Cuzco is such a unique place. I'll never forget the feel of it, with its steep uneven hills, narrow sidewalks, and Incan stones placed throughout town. In their winter, it's nice during the day -- it was between 65-75 when I was there to 35 in the middle of thenight. So you need mittens and hats along with your jacket. Buy some of their handmade alpaca wool items. Handmade alpaca socks are about $4 and make great Christmas presents.
It's very easy to get lost in Cuzco walking around, as the streets are all at strange angles to one another, and they change names. Half the time there is no name. I got lost my first 3 days there. My second 2 days, I had it down. Practice and bring a map. And do watch the cars. The sidewalk gets extremely narrow and cars don't watch out for you.
Hotels:
I stayed at the Amaru II in San Blas for around $35 per night including a very nice breakfast made to order. It was really nice, a few blocks from the action but not far at all. My room was downstairs, in a sort of basement. There was very little light but the advantage was that it stayed warm with the heater I requested (no extra charge) running. Inside the room there is a stone wall that reminds you of ancient buildings, although this was a reproduction I'm sure. The Amaru I nearby looked very nice too and actually has slightly better reviews than the Amaru II.
The other place I stayed was at the Hostal Marani. I booked this on on the internet before I left at $25 per night including a buffet breakfast (which they ended up charging me for somehow). The nice thing about this hotel is that the location is perfect, right next to San Blas Plaza, and that they pick you up from the airport for free. I had flown in from Juliaca after visiting Puno and they were right there with their sign and smile. I had an upstairs room at the end which was high-ceilinged. It was FREEZING in there. 62 with the heater on was the warmest it got. I would recommend a bottom, inside room between other rooms in the winter. The place was just fine but they overcharged me when I left, giving me 3 different bills all with different totals. I argued a little but it ended up being $10 difference.
Restaurants
San Blas area - I was looking at a menu for another restaurant and some guy put the menu for his restaurant in front of me and said mine is cheaper and better. Hearing the magic words, I looked and followed him through a store and upstairs into a great spot called El Batan del Inka. It's near Jack's in San Blas. Everything was so beautifully presented and at a very good price. I had quinoa risotto with roasted chicken. It was excellent. Jack's which is across the street is a great place if you're craving some down home food like a huge burger. Their burgers are HUGE! and expensive for Peru. They have all kinds of smoothies as well. La Taberna San Blas has Spanish tapas like tortilla, papas brava,... The music is great -- very cool place. Sumac on Siete Angelitos has a great menu and good food. I had one of their menus del dia which came with a pisco sour or glass of red wine. It was very good. For coffee, I went to Buen Pastor as recommended in LP. Their baked goods looked excellent. My problem was that I can't figure out how to order a coffee in Peru. The first time I ordered a cafe con leche (coffee with milk). They brought me a huge cup of hot milk and a tiny pot of cold concentrated coffee to add to the milk. The second time I explained that I just wanted a little milk and more coffee. They told me to order a cafe cortado which I did. They ended up bringing me exactly the same thing! And at another place in Lima I ordered a cafe cortado and they brought me a capuchino! So maybe just order a capuchino. I don't know..
Bars
On Tandapata above San Blas Plaza are all the cool bars. The Muse has couches and cool music. Good place for sipping tea or coffee or a drink drink. Mellow. Km 0 is a cool bar that has live music nightly. It has an upstairs too if you want to be able to talk. Better yet is a bar right around the corner uphill called Nuna Machay. I loved this place for live music. The bartenders are very friendly and easy to talk to. The band the night I was there played 60s like Aerosmith, the Doors, Led Zeppelin,...awesome!
I also went into Siete Angelitos on the street of the same name. This would be a good bar to go to if you're with a group since there are many different little rooms off the main room when you walk in.
Shopping
You are accosted constantly in Cuzco by people trying to sell you stuff or draw you into their restaurants. Ladies with alpacas or llamas stand in the street and ask if you want to take a picture (give them one sole if you do). But I found a little street with great shops with great prices. When you're walking downhill towards Plaza de Armas and you're on Hatunrumiyac (goes right by Jack's), right before the Incan wall to the left is a street with really good prices. Ignore all the street vendors in this area. They're expensive and pushy. If you let your eye drift to their stuff even for a second, they're onto you like glue.
Tours
Either book a city tour through an agency or buy a Boleto Turistico (around $50). My city tour included Sacsayhuaman (a must-see), Tambomachay, Pukapukara, Q-enpo, Tipon, and Quoricancha. These are mostly on the outskirts of town and are very interesting. And like I said earlier, book your Sacred Valley and Machu Picchu trips in Cusco.