I lived in Madrid for two years. The best place has to be the birthplace of La Movida. In this barrio you can find excellent alternative bars from cafe Isadora to bar el 2 de. To get a feel for the area sit on the western side of the square in Bar Arco (the other side is full of tourists.) Enjoy.
Malasaña district. Metro station: Tribunal (Lines 1 & 10)
Updates
Malasaña has two of the world's best bars - Tupperware and Maderfakers. Tupperware has plastic eyeballs stuck to the ceiling. Need I say more?
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