This article is from the Recreational Figure Skating FAQ, by Karen Bryden with numerous contributions by others.
Turnout, the ability to point your feet in opposite directions, has to
come from the hips joints, *not* the knees. You can tell if you're
doing it right by turning your feet out as much as you can and then
doing a knee-bend (ballet "plie"). Your knees should bend along the
same direction your feet are pointed. If they're further in, you need
to stretch more. Forcing turnout by twisting your knees is dangerous
because they can be permanently injured!
The following exercise is excellent for improving your Mohawks and
spread eagles by improving the range of hip rotation. After warming
up, lay on your stomach (on the floor) with your knees spread out, and
try to touch the soles of your feet together, while pressing your
pelvis towards the floor...
(Tough to describe this)..... I'll try an ASCII picture....
Right Knee
\ /\
Head-> O-|-| >= <- Feet
/ \/
Left Knee
 
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