I was messing around with GIMP and found that scaling an image down and back up again with cubic interpolation made a cool sort of blurry texture. I have just used the default texture pack for this, but it could be done with any texture pack in theory. At the moment I have only edited terrain.png, but I will slowly continue to finish the texture pack.

Additional Notes

Lots of blocks are bugged. I made a better version of this somewhere, I will try to find it soon.