This one is a biggie, clothing simulation at this level has been complicated to do and involved a lot of trickery. This year's SIGGRAPH paper shows the work of a collaboration of Cem Yuksel, Jonathan M. Kaldor, Doug L. James and Steve Marschner.
Their paper describes their way to accurately simulate knitted clothing. Fantastic!
Here some words on the project and some videos, even an implementation in Blender already exists!
The FreeD is a hand-held, digitally controlled, milling device that is
guided and monitored by a computer while still preserving the
craftsperson's freedom to sculpt and carve. The computer will intervene
only when the milling bit approaches the planned model. Its interaction
is either by slowing down the spindle speed or by drawing back the
shaft; the rest of the time it allows complete freedom, letting the user
to manipulate and shape the work in any creative way.
