You have to be "in" a moonwell to be able to make mooncloth. Moonwells can be found in various places, usually associated with night elves.
Generally they are small pools of glowy water. There's one in the park section of stormwind and several around darnassus, astrannar, etc...
The stormwind one doesn't glow though, so I'm not sure if that's the bug or the fact that it acts as a moonwell is the bug :-)
Edited, Wed Nov 2 11:50:21 2005 by thedreamer