A knitted version of this is described here: http://www.jemelv.dk/Undersider/baby/babystrik/babysok1.html albeit in Danish - so I just took a look at the construction and made a slip stitch version.

Domic was so nice to point out some typos, so there is a revised pdf up now. Please pn me with any errors or problems you encounter.

March 2012: Slightly revised the pattern, so there is a new download.