We stayed at Hotel Intur Palacio San Martin
Hotel Intur Palacio San Martin . We paid around 100 euros (not including 7% vat). I believe this was a special rate for the holiday time. We chose this hotel based on opinions gathered on this forum and fodors.com.
The hotel was VERY nice and modern, but VERY small. The bathroom was VERY small and awkward. We spent little time in the hotel anyhow so it didn't bother us too much. The hotel is steps from Puerta del Sol. You are right next door to El Cortes Ingles (which, over Christmas, had this fabulous animated singing display on the outside face of the store which drew hundreds and hundreds of families and children). When you walk out of the hotel, to the left is Puerta del Sol and to the right is Plaza Mayor. The location was excellent and steps from the Sol metro stop. You are also down the street from this chocolateria, open only at night, which is unbelievable. (I forget the name).
Overall I would recommend this hotel, but perhaps you could get a better deal somewhere else. I just went to Hotel Plaza Mayor's site and it looks like a great hotel - wish I had seen that!