Funny you should mention this...I have an idea percolating for a similar project. I saw a book on Amazon called "Tile Quilt Revival". Apparently this isn't a new idea! Methods used were needleturn applique and/or fusibles on to a backing fabric that makes the grout lines.
Google tile quilts and you get some great images. A mosaic of 1 in squares/shapes would be gorgeous! Go for it!