This is a term that I have always used to refer to something that is closely held together. This phrase is most likely used to describe a group of people or friends. If they are close knit that means that they are very good friends and it is generally hard to penetrate the inner circle of their friendship. I would also imagine that this term would have something to do with some sort of needle work but unfortunatley I am not versed in the finer arts of anything involving sharp objects. I would also hypothesize that what ever reference this term has in the world of sewing is also the origin of the phrase itself.