A hostel close to the centre of Granada, the Bearded Monkey is friendly and lively without being dominated by hard-partying backpackers.
Arranged around a central courtyard lit with twinkling lights, the (public) bar sells local beers, decent food and its own compilation CDs, as well as running DVD nights from the owner's great selection, for a small donation.
Check the noticeboard for good value Spanish lessons by local teachers (Anjelica is recommended) and trips to the nearby Lago de Apoyo, where the Bearded Monkey has a cabin, the Monkey Hut, with terraces running down to the lake - an excellent swimming spot.
Avenida 14 de Septiembre, opposite the bomberos (fire station).
Updates
I totally agree, Lago de Apoyo is definitely worth visiting, at least to see some howler monkeys in their natural habitat. I would also recommend staying further up from the Bearded Monkey at the eco-lodge run by a renowned American freshwater biologist. A very tranquil area. I do not recommend this hostel at all. It could be anywhere in the world, complete with package tours for non free-thinking, non-Spanish speaking Anglophones. The Lago de Apoyo tour is a typical example - it's definitely worth seeking out independent options in town as TheMurph suggests. Don't expect much help or sympathy from the staff if you have any problems. I broke my shoulder within the walls of this hostel after slipping on a recently mopped floor, getting up early to go on a nature visit I'd arranged independently in Grenada. The (Anglophone - English, I think) owners offered no help, pointers or even just ice, although one temporary member of staff suggested I might like to buy a paracetamol tablet in town. I was left to navigate the (rather good) Nicaraguan healthcare system alone. *Do* go to Granada - but *don't* go here if you are an independent traveller.
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