We found a great tutorial on how to make this lovely hooded towel over at Skip To My Lou. You will need a bath towel, half of a hand towel, ribbon or ric-rac for trim, needle and thread.
Start by cutting your hand towel in half. Fold over the finished edge of the one-half of your hand towel, leaving about a 10 1/2 finished length and stitch. Sew on your ribbon or ric-rac for decoration. Fold the towel in half, right sides together and stich across the bottom edge. Turn it right side out and you have the hood.
For the rest of instructions, and step-by-step photos go here.