This sounds like a really fun piece to make. I instantly thought of a full in you face large applique of the creature made out of faux fur and with some extra stuffing under it to make him more 3D. And then some satin stitching to add key features like eyes and such. Although it would be difficult to get life like features sewn in.
Good luck in creating it. The way it sounds like you plan on proceeding sounds pretty cool.