"warm, loosely woven woolen stuff," c. 1300, flaunneol, probably related to Middle English flanen "sackcloth" (c. 1400); by Skeat and others traced to Welsh gwlanen "woolen cloth," from gwlan "wool," from Celtic *wlana, from PIE *wele- (1) "wool" (see wool). "As flannel was already in the 16th c. a well-known production of Wales, a Welsh origin for the word seems antecedently likely" [OED].
The Welsh origin is not a universally accepted etymology, due to the sound changes involved; Barnhart, Gamillscheg, Diez suggest the English word is from an Anglo-French diminutive of Old French flaine "a kind of coarse wool." Modern French flanelle is a 17c. borrowing from English.