14 years after I originally posted this and I am pulling it out for a friend, so I'm republishing to make it public and at the top. If you know where to find pink/purple towels, let me know, Kohls doesn't make them anymore. I must give all credit to my Aunt Christine who has been making them much longer. I copied her towels.
First: purchase 1 hand towel and 2 bath towels. Make sure the hand towel has decorative seaming on BOTH sides.

Cut the hand towel in 1/2 (see how both sides have decorative seaming 1 1/2 inches in, many new towels do not have this)

Flip the towels over so the under stitching is visible. Then fold the seamed end up so that an inch of terrycloth is showing at the bottom. Sew along the top seaming. I try to sew 1/8 inch from the edge, do whatever is comfortable for you. I sew middle to end on each side so the edges are even.

Next fold the good sides together (you will not be able to see the decorative seaming (if you can think up a better word at 9 pm let me know). Sew the cut edge 1/4 inch in from the seamed end to the fold.

Flip it right side out and you have a hood, with the cut edge hidden inside.

Take the bath towel, put the tag on the bottom and place a pin in the middle on the top (look for tiny red dot top left)

Match up the pin with the seam for the hood (right sides together-yes towels have right sides, check the visible stitching). I pin it on either side of the hoods' seam and then sew middle to end. Make sure you get all three layers when you get to the hood's double layer. You may need to hand wind your machine through the thickness at that point.

Half done hood.

All done hooded towel. A wonderful baby gift because it lasts for years. Nicole received a robe last Christmas because she outgrew hers, she was 9. Note: Aunt Christine covers the decorative stitching on both towels with cute ribbons.
The hitch: if you're currently in my ward, you are prohibited from making these for any newborn in our ward without checking with me first, capish?