Even if you don't stay at the following art hotel, you should visit its website. Go to:
www.propeller-island.com. Mr Canuck and I stayed at this hotel in June 2004 and had a great time. It is centrally located (in West Berlin), about 2 long blocks to a convenient metro station. It is not a traditional, full-service hotel, but we found it that everything worked fine, email queries about bookings were handled promptly, the staff on reception were friendly and helpful, that breakfast was a good value, etc.
What's special about this hotel are the idiosyncratically decorated rooms. While the hotel doesn't reflect "traditional Berlin", it certainly strongly reflects an aspect of Berlin culture - and that's its artiness. Some of the rooms were a little too out there for our taste (would you like to sleep in a coffin? or perhaps a recreation of a East German jail cell, complete with an escape hole in the wall? or a room with a suspended bed? or one where all the furniture is on the ceiling - and you open up compartments in the floor to find your bed?). But they're fun to look at anyway. There are a number of very interesting (and/or beautiful) rooms that aren't quite so disconcerting. The prices are quite reasonable - there certainly a rooms in the 100-110 euro range. When you make a booking, you specify your top 3 room choices (so you won't end up in the dungeon unless you want to), and then staff reply and tell you what's available.
Have fun!