Yup! Just stick it in the room, and watch it start to level up. ^_^
Now, that doesn't keep its energy/happiness bars full, so you can still help level it that way.
If you put it on a brand new 0xp knuffel, and never ever feed it, and never ever play with it, and never ever dig with it, you'll still have a lvl 100 knuffel in one month. (Regular knuffel. Wild knuffels are even faster).
If you have it on the knuffel but still feed/play and dig with it, you'll have that lvl 100 knuffel faster yet!
It's awesome
Just look at her:
http://kofk.de/knuffel.php?i=B1AFA95A Believe me, I would NOT have managed a lvl 68 knuffel on my own. And I even have a lvl 100 one as well.
http://kofk.de/knuffel.php?i=FEF53550 (she's got my one and only Amely the Cat, since that means 50 digs instead of 25. ^_^ Still need to get a fountain for her though)