I did a bit of google searching and found this website containing a translation of an SS circular which seems to be where the 'blanket and socks' accusation stems from.
http://www.nizkor.org/hweb/camps/dac...e-of-hair.html
Amtsgruppe D - Concentration Camps
D II 288 Ma./Ha. Tgb. 112 geh.
SECRET!
Copy 13
Re: Use of hair cuttings
To the Commandants of the Concentration Camps Arb., Au., Bu., Da., Flo., Gr.Ro., Lu., Maut/Gu., Na., Nie., Neu., Rav., Sahs., Stutth., Mor., SS SL Hinzert.
SS Obergruppen fuhrer Pohl, Chief of the SS Wirtschafts-Verwaltungshauptamt has ordered that the hair of concentration camp prisoners is to be put to use. Hair is to be made into industrial felt or spun into yarn. Woman's hair is to be used in the manufacture of hair-yarn socks for 'U'-boat crews and hair-felt foot-wear for the Reichs-railway.
It is therefore ordered that the hair of female prisoners be disinfected and stored. Men's hair can only be put to use if it is longer than 20 mm. SS Obergruppen fuhrer Pohl therefore agrees for an intial trial period to the growing of the prisoners hair to a length of 20 mm before it is cut. Long hair could facillitate escape and to avoid this the camp commandants may have a middle parting shaved in the prisoners' hair as a distinguishing mark, if they think it is necessary.
It is planned to set up a hair processing workshop in one of the concentration camps. Further details as to the delivery of the accumulated hair will follow.
The total monthly amount of male and female hair is to be reported to this office on the 5th of every month beginning from September 5, 1942.
signed: Glucks
SS-Brigadefuhrer und
Generalmajor der Waffen-SS
(Translation of a report from IMT, Band XX, Nurnberg 1947, taken from Concentration Camp Dachau 1933-1945, ISBN 3-87490-528-4, p. 137; Plate 282 with translation.)
However there is no further evidence to prove that these plans were successful and if the hair was actually used in the production of socks for U-Boat crews. It may well have just become packing material, or the project could well have been abandoned.
A transcription from the Nuremburg Trials refers to photographs from Auschwitz used as evidence during the proceedings:
"7 tons of hair which was taken from dead women, packed for shipment to Germany"
The Nuremburg tribunal go on to state that the hair was used for 'Industrial Applications'. Full transcript here:
http://avalon.law.yale.edu/imt/02-19-46.asp