I just returned from two weeks in Mexico, and am very happy to have spent two nights at Casa Kloster in Guanajuato. My girlfriend wanted to try a more "hostel-style" location, after we'd spent several nights trying out a number of different hotels.
Casa Kloster's strongest points are its low cost (90 Pesos per person as of June 27, 2002) and most importantly its very, very traveler-friendly atmosphere. The building (a large old-style center-courtyard home) is run by an entire family, has four private restrooms with hot water available at all times, sixteen visitor rooms, soda pop and beer available in the office between 10am and 11pm, and a vibrant garden located in the center along with a dozen or more caged (and well tended-to) songbirds.
You should know at least enough Spanish to reserve your room -- but if you're a fluent speaker or are actively learning, you'll find the employees at Casa Kloster to be open, friendly, and just as conversational as you wish them to be. And if you are travelling with children, you can expect to be treated as extended family from the moment you arrive.
My only regret is that we weren't able to stay with them longer!