Approaching the planning in a piecemeal fashion, airfare, then ground, then others, etc, while simple, is not likely to give you what you want within your budget. Here are some consideration why you need to look at several options.

1. The airfare is market based. What the booking engines offer you is the reality. "Flying to so and so gives you the best price" etc is just a guess, that might have been true for a trip that took place sometime in the past. You have at least 4 airports to play with: Vienna, Frankfurt, Nuremberg, and Munich. Actually look at what are offered by the booking engines. Look not only at the prices, but whether the arrival/departure times are acceptable, whether the layover timing is realistic.

2. For each air combination, how would you connect destinations? You have looked at one air option. For rail options, look at:
www.oebb.at for Austria
www.bahn.com for Germany
If your travel schedule is solid, you might want to get nonrefundable web discount fares if they are still available.

Are you traveling alone? If not, there are some non peak time, slow train group discounts:
www.bahn.com/i/view/USA/en/prices/germany/regional-offers-overview.shtml

3. Accommodations also use market based pricing. The prices change depending on the week and the days of the week. What it means that staying in a destination on a certain day of the week costs less than staying there on other days due to the pricing as well as availability of lower price rooms.

So, in order to optimize your routing within your budget, you have to put together several options adding the air, the ground, and the accommodation costs achievable with each itinerary.

Hello Saira,

I would be able to give you better advice if I knew you were traveling by yourself or with others. I've traveled to Europe over Christmas 5 of the last 7 years, and one of the great advantages is taking advantage of low season rates for hotels and rental cars. Take a look at Hotwire.com and Priceline.com for hotels. My wife and I stayed at a 5* Renaissance hotel for $65 a night last year and a few years ago we stayed at a 4* in Munich for $70 a night. Both bid on and booked through Priceline and those are dollars not Euros. Priceline doesn't do rental cars in Europe, so check out the rates on Hotwire.com. If you've never used either website, checkout betterbidding.com and biddingfortravel.com. Both sites have tutorials on using priceline and hotwire and both will tell you the successful prices others have gotten in the cites you wish to go.

1. I've flown into both Frankfurt and Munich based solely on the price. It doesn't add much to your subsequent driving, air or train travel to fly to either. If you can save $100 bucks going into one city over the other, especially if more than one person is traveling, do it.

2. I've flown into Franfurt, driven to Rothenberg and then to Vienna. If two or more are going, seriously consider a rental car. I did a quick check on expedia.com on flights from Frankfurt and Munich to Vienna, and roundtrip was $128 and $125 respectively. I used 18-21 Dec as the dates. Not sure where you got $300 from, but it certainly be had at a cheaper price.

3. I love Rothenberg and the market is spread out so you have to walk throughout the town. Vienna has several markets, but the biggest and best was in front of the old townhall. Nuremburg's is huge and possibly a bit overwhelming. You can't go wrong in any of the places you've chosen and will have a blast.

2.
Check bahn.com for rail travel from Germany to Austria, oebb.at for the other direction. Saver fares will appear when available. Nuremburg, Regensburg and Munich all have direct train connections to Vienna.
Forget rental car, cross border drop off fee will in most cases be remarkably high.

3. christmas markets
Rothenburg is quaint that it hurts. Weekends should be hell with hordes of day tripping visitors.
Nuremburg is the biggest of all. Very busy on weekends.
Munich has several, from big to cosy to medieval.
Regensburg has a beautiful one within the Thurn and Taxis palace premises.
Vienna also has many markets, from big at Town Hall (Rathaus) to small in the old town and elsewhere like Schönbrunn palace.

Thank you so much, everyone! This is VERY helpful. I will be traveling alone - will do some research based on your recommendations.

2 years ago I went to the Christmas market in Nuremburg (BTW there are lots of other sights to see there as well). I flew home on Delta via Paris. Given you are flying from Atlanta, Delta might give have some good options for you.

Currently in Vienna at the markets! Will report in after I have I have visited them all

Great, SusanC! Look forward to hearing about your experience there. Cold yet beautiful?

I am in Vienna today, 12/14/12 You may already be on your trip. I have thought Munich was the big place for Christmas markets till we came to Vienna. They are every where you turn here. Big ones at at te Rathaus, schonneburg palace, Historische Kunst Museum and Belvadere but there are others at just about every wide spot in the road. We are in Christmas market heaven.

Pre-christmas time is almost over, but maybe for next year, for all you christmas-market-fans: DON'T go to Bernkastel by the Moselle river for Christmas market: http://wp.me/p2XcOE-1f
Go there for vintage time instead.