You're having fond memories of "El 21", located on Calle Toledo, 21, just off Plaza Mayor. Sadly, I beleieve it closed down. It was run by a jolly old couple who served up little shots of drink, some of them burning, with names like Volcan, Diablo, and, with a raucous cackle as the señora plopped it in front of you, el Erotico. Too bad but that's progess.
Maybe someone in Madrid now can go by and check if it's still there and let us know.