Spain has become one of the world's centers for design of every kind. You'll have no trouble finding traditional crafts, such as ceramics, guitars, and leather goods (albeit not at countryside prices), but, at this point, the city is more like Rodeo Drive than the bargain bin. Known for contemporary furniture and decorative items as well as chic clothing, shoes, and jewelry, Spain's capital has become stiff competition for Barcelona. Keep in mind that many shops, especially those that are small and family run, close during lunch hours, on Sunday, and on Saturday afternoons. Shops generally accept most major credit cards.
Madrid has three main shopping areas. The first, the area that stretches from Callao to Puerta del Sol (Calle Preciados, Gran Vía on both sides of Callao and the streets around the Puerta del Sol), includes the major department stores (El Corte Inglés, the French music-and-book chain FNAC), and popular brands such as H&M and Zara.
The second area, far more elegant and expensive, is in the eastern Salamanca district, bounded roughly by Serrano, Juan Bravo, Jorge Juan (and its blind alleys), and Velázquez; the shops on Goya extend as far as Alcalá. The streets just off the Plaza de Colón, particularly Calle Serrano and Calle Ortega y Gasset, have the widest selection of designer fashions -- think Prada, Loewe, Armani, or Louis Vuitton -- as well as other mainstream and popular local designers (Purificación García, Pedro del Hierro, Adolfo Domínguez or Roberto Verino). Hidden within Calle Jorge Juan, and Calle Lagasca and Calle Claudio Coello is the widest selection of smart boutiques from renowned young Spanish designers, such as Sybilla, Josep Font, Amaya Arzuaga, and Victorio & Lucchino.
Finally, for hipper clothes Chueca is your best stop. Calle Fuencarral, from Gran Vía to Tribunal, is the street with the most shops in this area. On Fuencarral you can find name brands such as Diesel, Gas, and Billabong, but also local brands such as Homeless, Adolfo Domínguez U (selling the Galician designer's younger collection), and Custo, as well as some makeup stores (Madame B and Mac). Less mainstream and sometimes more exciting is the selection you can find on nearby Calles Hortaleza, Almirante, and Piamonte.