There are a number of tools you would use for a project like this.
To rough it out, I would first draw a profile pattern and transfer it to the wood.
I would then drill the mounting hole while the block is still square/rectangular. After you start shaping it, it will be diffficult to rill easily.
At this point, I would also put a threaded insert into the block. If you do this later, depending on how thin thhe wood becomes at the mounting point, you run the risk of blowing out the wood around the mounting hole.
You can get the threaded inserts you would need at McMaster Carr:
http://www.mcmaster.com/param/asp/PS...MainWidth=1713
I have experience with the "knife edge" inserts. They work great - you drill a hole and run the inserts in with an allen wrench.
Then, time to rough it (oversized) to the general shape using either a band saw, jig saw or even a coping saw. Now that you have the insert in there, you can fashion something with a stud or bolt sticking up that you can mount the knob to so you are able to work it.
To get closer to the shape you want I would then use a rasp or a power detail sander with 50 grit so you can remove alot of material. Maybe even a dremel - the only problem with something like a dremel is that spinning a small diameter cutter has a tendency to dig into the wood.
Continue shaping it coarse paper until you get close to the desitred shape, then progressive use finer paper until you get it where you want it.
If clear coating, be sure to sand between coats to get a nice smooth final finish.