Let's make some bread dough ornaments!
2 Cups Flour
1 Cup Salt
1 Cup Cold water
Knead to make a thick, smooth dough. It helps to use a food processor or mixer.
After you have shaped or cut out your ornaments, first let them air dry for a few hours, then bake at 257 degrees for several hours until dry. You may prefer to dry them on racks over the register for a week or so. The slower they are dried the less likely they will develop cracks.
You may color the dough with food coloring to start with, or paint the ornaments once they are done. Acrylic paints or water colors will work, or look for "gouache" which is between the two. Always finish with clear acrylic or shellac.
Preserving the ornaments is always an issue, especially in a high-humidity environment. The key is to make sure they are 100% dry before painting and sealing them. You may wish to dip the finished ornament in melted paraffin. You can buy silica for storage with them if humidity is very high in your area.
For shaping, you can use your hands, cookie cutters, stamps perhaps, and various other tools such as those that potters use, as well as tools you find around the house. Try a garlic press for an interesting texture for hair.
You may want to purchase an inexpensive tool called the "Klay Gun", an extruder for making a variety of shapes, from Kemper Tools (http://www.kempertools.com). I'm sure you can find it at a variety of craft shops. I also found it at http://www.prairiecraft.com/klaygun.html. for $9.99.
Example of finished ornament:
Here is an alternative recipe--for clay rather than dough:
1 Small Box Baking Soda
1 Cup Corn Starch
1-1/4 Cup Water
Combine in a saucepan and cook over medium heat stirring constantly. If you want to add food coloring, do it while stirring. Cook and stir until the consistency of mashed potatoes. Do NOT overcook or the ornaments will crack. When ready, put the mixture on a plate and cover with a wet cloth to cool, then shape as desired and let dry overnight before decorating.
Hint: use a paper clip or a hairpin (not a bobbi-pin, which isn't as fine a wire) for the hanger and push it into the ornament before drying. The ornament will hang better that way than if you put a hole in it (which may weaken it as well, of course).