You see, all hair (be it wool, hair or fur) has small scales on it, pointing away from the body. (The directionality functions to shed dirt.) When the fiber swells in water the scales are pushed outwards. If the fiber is then put under repeated pressure it moves towards its "root" end.

In the midst of other fibers, no one fiber can back up because of the scales sticking out. The individual fibers ratchet past and around each other.

Other structures of the shaft come into play as well, and simply speaking the curl or crimp points the end in a certain direction. Given enough repeated pressure the fibers end up snarling around each other. (Since finding this out I've been surprised, in retrospect, that there are no fairy tales in which some lass must untangle the fibers of a felt rug or some such item.)

This felt is known as "true felt", at least by those of us who make it.

"Superwash" wool is wool in which the scales have been coated, so the fiber, when agitated, can slide back and forth next to its fellows without snarling around them. "Craft" felt consists of fibers that are entangled not due to pressure and damp, but through the use of special needles which grab the top fibers and push them through the batt. (Because of these needles, any fibers can be snarled together to some extent. For example, tea bags, disposable diapers, and many sorts of quilt batting are made through use of this technology.) Numerous feltmakers use these needles in their own felting of figures--it's quite a hit in the felt artist world today.

"Boiled wool" is knit or woven fabric that has itself subsequently been wet-felted or "fulled" (and therefore cannot be made from superwash wool).

Detailed instructions for making flat felt can be found here: Shelby Cefaretti's flat felting instructions.

Another description of "felt" and a link to Mongolian people making felt can be found at mamaquilla.