Needle felting is an easy technique which uses roving (unspun fiber, usually wool or silk) to create felt by pushing the needle straight up and down through the fiber. This is a simple way to sculpt small animal figures in miniature for dolls' houses, which makes them a good size for a Christmas tree ornament. They can be completely felted, or hair can be applied.
The miniature raccoon project covers all the techniques you will need to create an entire tree full of different animals.
Dogs and cats are easily made using this technique as well and the book Fleece Dog which is reviewed here covers how to make a number of different miniature dog varieties from fleece.