A friend told me that you can use Derwent watercolour pencils on fabric, it has to be the Inktense pencils which are particularly heavy with pigment. I've had a bit of a go with the pencils and its pretty good, they don't blend quite as well as on paper and be careful near the edge of your drawing as it can feather beyond your outline.
Overall I'm quite happy with the result and will be able to use this effect for small craft projects. I ironed it to set the pencils but I wouldn't want to use it on anything large scale as I don't think washing is an option.
This afternoon I used one of the fabric drawings and made a pincushion.