beckham, I've stayed at and can recommend
Hostal Aresol , just a stone's throw WEST of the Puerta del Sol. You can see the Comunidad de Madrid building from its front balconies, in fact.
I can also personally recomend
Hostal Oporto , east of the Puerta del Sol and a little east of the Plaza de Canalejas and behind the parliament building (Congreso de los Diputados).
And while I haven't stayed there personally, I have toured and have read lots of positive buzz here about
Hostal Adriano which is just south of the Puerta del Sol and in a lively area of the old center with lots of bars, restaurants, a few pedestrian streets. It's a nice place!
Let's see... what else.... There are SO many choices, really. Anyone else?
Saludos, MadridMan
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