I don't know if you are Jewish or not or if you care, but I found the best hotel to be in the Palestinian district near the old city. It's called the American Colony. I think I did a trip report on it a few months ago.

Many famous people stay there and it has a very long history dating back to when a Pasha owned it and built a number of rooms for his wives. Ask for one of these rooms and you won't be disapointed. It used to be owned by Baron Ustinov and I think Peter Ustinov may own it now.

The outdoor barbecue they have is excellent! Check out http://www.americancolony.com/ and read about the history of the hotel whether you go or not.