Tuebingen ( http://www.tuebingen.de ) is simply our favorite town in Germany, just quintessential Germany, with its hilly cobblestone streets, half-timbered houses, castle, interesting nontourist shops, one of Germany's oldest universities, and the nextdoor delightful medieval well-preserved Bebenhausen Monastery. Having attended what is Germany's largest chocolate festival, I wouldn't go again as we didn't find it that good and had a hard time finding anything that appealed to us to buy. What will happen is some streets are full of stalls and crowded with people which will hamper your getting about the city and enjoying it. I believe that their Christmas Market is the next weekend and lasts only for it. If you cannot find a room there, Stuttgart ( http://www.stuttgart-tourist.de ) is less than an hour away by train and has several hostels, of them, I would prefer Alex30 which we lived across the street from it.
Stuttgart has one of Germany's largest, oldest, most visited and most beautiful Christmas Markets ( http://www.stuttgarter-weihnachtsmarkt.de only in German) which takes up a good share of contiguous central Stuttgart. The stalls all have highly decorated roofs, probably the best of anywhere in Germany, and the setting is lovely by the Old Palace, New Palace and Stiftskirche (old church). Although visited by over 4 million people, Stuttgart has taken great efforts in reducing crowding in the market, and I've now visited on Saturday evenings with no problems unlike other of the popular Christmas Markets.
15 minutes away by S-bahn are two smaller themed Christmas Markets which each receive over a million visitors a year: Esslingen ( http://www.esslingen.de ) Medieval & Christmas Market set in the well-preserved medieval center of town particularly nice in the evening when lit up by torches; and the Ludwigsburg ( http://www.ludwigsburg.de ) Baroque Christmas Market which is also particularly nice at night with the large angels made of lights. It is close to Germany's largest perfectly-preserved (all original) palace (in http://www.schloesser-und-gaerten.de ), called the "Swabian Versailles" for obvious reasons, their English-language tour being the longest (1.5-3 hours) and best palace tour that I've been on in Europe, and I've been in plenty of others.
Another excellent Christmas Market is in Bad Wimpfen ( http://www.badwimpfen.de ) which is weekends only. It could be quite crowded because of its limited hours and its popularity.
Edited by: marcopolko