Cat's Hostel in Madrid is one of the most beautiful hostels I have stayed in. It isn't much to look at from the street, but inside is a 17th century palace with a great courtyard and mosaics. It is located within a few blocks of the subway, and it is within easy walking distance to a grocery store. The hostel also includes a bar in the basement which hosts local music groups. They had a cheap payaya night that was very tasty, and they served a free continental breakfast when I was there. They also offered a beer vending machine but no kitchen. The hostel had 3 computers with internet access that were often in use, but there was also free wifi in the hostel.
I think the biggest drawback to this hostel was the small room size, and I would recommend getting a room with the fewest possible number of beds. The beds were about 2 feet apart, and my room contained a snorer as usual.
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