First and foremost it will be a great way to spend some quality time with your son or daughter. (Yes boys can work with yarn too!)
Confetti Yarn: This yarn is very lightweight and soft as soft can be. It usually comes in pretty pastel colors, just perfect for knitting for baby. You can use this yarn with another, or on its own. I used confetti yarn when knitting a blanket for my granddaughter Julia. I alternated rows of confetti with rows of another soft pastel baby yarn. The results are wonderful.
Early Angels: This is a site based in the U.K set up to help people to knit, crochet or sew clothes, blankets and other keepsakes for premature, low birth weight and sadly stillborn babies. They have a wide range of free knitting, crochet and sewing patterns accessible on their pattern page.
Other smaller accessories that can be particularly useful when working on a knitting project are stitch markers, which can be used to mark particular points in a pattern that you are working on. These often come in the form of small rings which can simply be slipped onto your knitting needles as you knit.
Yarn: Premature babies have very delicate skin and can often be allergic to wool; therefore it is best to steer clear of garments made with a wool mix. Acrylic yarn is more appropriate when knitting for preemies. Ideal yarn to use for preemie knits is baby double knit or 4ply yarn. Most preemie patterns will use these.