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Rit dye should work.... Just use the powder form not the liquid. As you can then make it as concentrated as you wish. Many wood workers use that same dye for wood coloring.
I wouldn't buy a sheath made using clothing dye, but I'm funny like that. Now if you're just making something for yourself or playing around, well then I fully endorse that. The way leather dye was explained to me is that it is simply pigment suspended in whatever carrier is used, be it water, spirits or "oil" (there's some debate about whether or not oil is even actually used). If it really is that simple, then I'd be concerned about whatever else is in products like Rit. Clothing dye has the potential to damage the cloth, but I'm no scientist, I can't tell you why, or if whatever causes that can also damage the leather fibers.
I stopped by Hobby Lobby in my area (it's a big store) and they had only one bottle of eco-flo in a brown shade. The only thing that I saw there that I think makes it worth a visit is the Tandy overstitcher wheel kit. They ask $20 for it and that is a very competitive price. Everything else I'd buy online or make.
What tools are you using to make your sheath? Some of the recommended items can be fudged, but some are more necessary. How are you doing the stitching? Where are you getting your leather?
Although I've made small projects in the past, I'm only now thinking about using leather in a serious manner. I spent about $150 to make the above sheath. I had some supplies already, so probably closer to $250, but now I have the supplies (including great leather) to make several sheaths.
Let me know if there's anything I can do to help.
Read this thread too. Trust me on this one.
http://www.bladeforums.com/forums/showthread.php?t=1139038