The dish cloth situation in our house is dreadful. Despite the three knitted ones I recently added to the collection, we are still perpetually running out of dish cloths. Perhaps if people hung them over the faucet to dry rather than leaving them balled up in a dirty, stinky mess in the bottom of the sink this wouldn't be a problem...but that's another story.
I have several towels that are about the right size to dry a garden gnome. They are also low quality enough that you would be embarassed to hand them to a garden gnome despite the fact that he or she was not in fact alive and therefore unable to notice the aforementioned low quality. Today I finally found a use for these towels that, despite their apparent uselessness, I couldn't bear to part with (you all know the drill...but what if I need a garden gnome sized towel???)
I cut the towel into 8 dish cloth sized sections and then I used my sewing machine to zig zag stitch the edges to prevent fraying. I trimmed the edges and now I have plenty of dish cloths. I don't know what impressed me more, finding a use for the towels or figuring out how to use the zig zag stitch on my sewing machine!