This bag uses a chart from a most excellent book called Here Be Wyverns, by Nancy Spies. http://www.weavershand.com/ArelateStudio.html
Knit 2 rounds in MC.
Round 3: Knit 25 stitches, bind off 20 stitches, knit 50 stitches, bind off 20 stitches, knit 25 stitches.
Round 4: Knit 25 stitches, cast on 20 stitches, knit 50 stitches, cast on 20 stitches, knit 25 stitches.
Rounds 5-9: Knit
Round 10: Purl
Rounds 11-14: Knit,
Bind off all stitches.
Fold handle fabric to the inside at the purl row, tacking it down with stitches.
Turn bag inside out, and seam the bottom with mattress stitch. Sew in all ends.
This bag needed to be run through the felting process twice. (Throw it in the washer with towels or jeans, wash on warm or hot/rinse on cold.) Stuff it with plastic bags or find something else to use as a "mold".