Sensation is a big deal these days, with a lot of attention being paid to helping children integrate their senses.
While knitting is not primarily a sensory activity, it does require sensation in order to do it, just like any motor skill. Only with sensory feedback, can the brain plan the motor activity and bring it to execution, making necessary adjustments based on sensory feedback. And of course the pleasurable sensation of soft and comforting fibers on the skin and rich, satisfying colours in the yarns themselves are part of the sensory experience.
Tactile sensation includes the stimulation of sensory receptors in the skin for light touch and pressure. This happens with the yarn moving through the hands and fingers, and the holding of the knitting needles while manipulating them.
Visual stimulation is initially relied on to guide the movements. Paying visual attention to the details of where needles are placed and the sequencing of the movements helps the learner knitter to master the skill.
Proprioceptive stimulation is happening all the time, and becomes the sensation you rely on in conjunction with tactile stimulation once the skill has been mastered. You can work with your hands without looking at what you are doing.
There are handcrafts, such as paper making which involves working with wet mushy materials that is a great sensory experience for children.
For more reading on sensation as a broader topic, about being able to integrate sensory experiences so as to gain motor control, Jean Ayers wrote a very good book on her pioneering work on Sensory Integration. She was an OT who devoted her professional life to exploring and understanding sensation and how it affects function. She coined the term Sensory Integration.
Today more and more is discovered and understood about the different sensory systems and how they interact and what happens when they are not stimulated enough, stimulated too much and when individual children have problems integrating sensations, either by over stimulating themselves or avoiding stimulation.
Two books that are a fantastic resource for deepening your personal understanding of sensation as it is understood in child development are Sensational Kids and The Out of Sync Child has Fun. They go into more detail for the interested parent, teacher or therapist, way beyond the scope of sensation as it pertains to hand work.