Yes, the Opies on the trail..... In "The Singing Game" (Iona and Peter Opie, OUP, 1985) they call it the only survivor of the ancient "Thread The Needle" game, of which visual record goes back to the Lorenzetti frescos in Siena in 1350! Variations are found in Appalachian dance ("Killiecrankie, Winding Up the Maple Leaf, etc.) and in England under "Dan, Dan, Thread the Needle."
They note that the problem with the Manchester Ship Canal origin is that there is an 1870 recollection from New Zealand; and that it has some obscure connection to the Christmas ships sailing, and various "through and throught the salley go" threading the needle songs. They give an extensive description of how to play the game, as well as a picture, which I am puzzling out. Boy, I can hardly wait to try this one out.....

One version:
1) Long line of people holding hands.
2) The two people at one end, hold up their hands to form an arch.
3) The player at the other end of the line, everyone still holding hands, runs through the arch, pulling everyone along through as well. (Thus twisting the original arch makers)
4) The new two leading people form an arch, and the last person in the line (one of those who had formed the original arch) goes through, and the process continues until everyone is twisted around.
5) They then form a circle of their twisted arms, and fall down at the end!!!!!

Up against the wall version:

1) Long line with last person making an arch with her hand high up on a wall.
2) Person at other end leads whole line through the arch, and last person's arms are thus crossed over
3) The orginal line leader now moves the line through the arch (alley) between the player at the wall and her nearest neighbour, who is likewise "stitched". The line then goes through the arch between the second and the third player.
4) And so on. After the last stich is made, all players go into a circle. Dancing in a circle, or falling down ensuues!!!!
yours, Peter T. ^^