It started around ~ the beginning of the 12th century in Southern Europe, most likely Spain and/or Sicily. The knowledge came most likely from china via the arabic empire(s).

Paper was made from plant fibers and rags.

Basically, you "cook" rags until they dissolve, take a sieve and get the stuff that is floating. Then you let it dry. If your sieve has a symbol attached on it (in a way that you can feel it), you will get this symbol as watermark.

Unfortunately, most of the books you will find about this subject are not in english, as you will see in the Medieval Latin Palaeography: A Bibliographical Introduction (pages 235ff.)

You could read:

McMurtrie, Douglas C: The Book. The story of Printing and Bookmaking, Oxfors Univ. Press 1967

Ruth A Johnston: All Things Medieval: An Encyclopedia of the Medieval World (2011), pages 554-557 for a quick overview

You'll find a picture (in pdf-format) here: http://www.hrc.utexas.edu/educator/modules/gutenberg/invention/papermaking/

Direct link to pdf

Roughly the same technique is still used here: http://khadi.com/about-the-paper/indian-cotton-rag-papers/

I happen to remember that I read during my time in University an awesome book with lots of illustrations. Could have something like "Technikgeschichte" in the title... If I remember (that was years ago, so don't expect me too), I will edit this title in.

edit formatting...