c.1500, probably from Welsh gwlanen "woolen cloth," from gwlan "wool," from Celtic *wlana, from PIE *wele- "wool."
The Welsh origin is not a universally accepted etymology, due to the sound changes involved; some (Barnhart, Gamillscheg) suggest the English word is from an Anglo-French diminutive of Old French flaine "a kind of coarse 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]. Modern French flanelle is a 17c. borrowing from English.