Stockholm city centre, which is not that large itself, is divided in several districts. Some of them are better places to stay than the others, but it always depends on your taste, budget, and why you are coming to Stockholm.
Gamla Stan literally means The Old Town. It is the heart of Stockholm and Sweden, dominated by the Royal Palace and surrounded by water on all sides. It has great location, great atmosphere, but quite limited number of hotels.
While Gamla Stan is the historical centre of Stockholm, Norrmalm is the real (modern) centre of Stockholm. It is located immediately north of Gamla Stan, around Sergels Torg (main square), Central Train Station, and Hamngatan (main shopping street). If you come to Stockholm for shopping, business, or nightlife, Norrmalm is the right place to stay. However, room rates tend to be among the highest in the city.
Östermalm is the upscale district of Stockholm city centre, but that doesn’t necessarily mean expensive hotels (in Stockholm terms). The location is still excellent, immediately east of Norrmalm and north-west of Djurgarden. Östermalm has wide streets with trees, including some pleasant and quiet ones.
Södermalm is located on the other side, south of Gamla Stan. Compared to the areas listed above, Södermalm has probably greater share of cheaper hotels. Most hotels here are concentrated in the northern part (near Gamla Stan).
Another relatively cheaper place to stay in Stockholm is Vasastan, which is located north of Norrmalm, around Odenplan and Eriksplan metro stations. It is still easy (about 15 minutes) to walk to the very centre from here.
The last of the big central districts is Kungsholmen (King’s Island), which is located immediately west of Gamla Stan and Norrmalm. The concentration of hotels on Kungsholmen is much lower than in the other areas. Most hotels are located in the eastern and north-eastern part of the island, closest to the centre.
Some people are interested in staying on Djurgarden, which is the large recreational area next to Stockholm city centre, with Skansen, Stockholm Zoo, the Vasa Museum, and Tivoli Amusement Park. However, Djurgarden is dominated by parks and forests and there are very few hotels. Among them are: