My favourite accomodations are the hostels in the Old City, especially in the Labrynthine streets around Damascus gates.Most are cheap and friendly and often have a Travellers Bar or eating room of one kind or another. The only drawback is the curfews as the old city closes down at night. Be sure to ask when you check in.
For the best views get a mattress on the roof of the Petra Hostel. Sunrise and sunset over the Old City and its environs are amazing from here.
I stayed for a while at the Tabasco Hostel, which I know is still there. 5 years ago a dorm bed cost 12 NIS, a roof bed about 10. It was one of the cheapest backpacker hostels, i doubt much has changed. The Tabasco Tearooms, one of the main travellers meeting places in Jerusalem, is located underneath the hostel, just inside an archway. The staff here are great and can sometimes help you out getting work and also info on sights and tours.The food and drink are cheap. The only drawback is the noise from the bar, if you are looking for a peaceful nights sleep!
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Theme: Hostel
Comparison: least expensive
Directions: Tabasco Hostel; on Aquabat al-Takiya Street. Look out for the sign as you come through Damascus Gate, down the wide stairs and take the covered street along the fork to your right.
Other Contact: tel no; used to be (628 3461)