Ian
Pages Grid method as asked:
Construct one using the drawing/lines tool and the Graphic inspector to position multiple sets of lines that you repeat.
Other people have done this already for you:
http://www.printablepaper.net/preview/grid-portrait-a4-2mm-index
http://www.mathsphere.co.uk/resources/MathSphereFreeGraphPaper.htm
http://www.printfreegraphpaper.com/
1. Create a Pages layout file, turn off the header and footer and documents layer
2. Drag in the image you want to render as knit and size as you want. Turn off Text Wrap.
3. Drag in the Grid pdf file and position over the image, make sure it is sized to 100% size in the Graphics inspector.
4. Reduce the transparency of the grid or the image or both to taste. The grid should not have a white background anyway.
There is another better way:
Open the image in Preview App or any image editing program and change its size to the finished size you want, then change the resolution of the image to 5 pixels/cm. The image will then render as colored squares each 2mm which is what I think you really want so you can then work out the knitting pattern to reproduce it.
In programs like Photoshop and Pixelmator you can even set the image to use a reduced palette of colors say 16 or so to make the squares a selection of the wool colors you will use.
Peter