I am travelling to the South of Spain for New Years and the following weeks. I was going to fly into Madrid, assuming it would be the cheapest, spend 2 nights, then move on to Sevilla. However, i just realized, flying into Malaga is the exact same price, and i assume cheaper to get to Sevilla.

I know Madrid is icy cold in December, would it still be recommended to go there for 2 nights, or is it best saved for the warmer months?

We where in Madrid for New Years this year and the weather was fine. It does get a bit chilly at night and it does rain from time to time, but who cares? It's no different in Paris in the winter.

It's true that Madird does have a real winter - but it's ot THAT much colder than the south - which will be less chilly, but by no means warm - and canstill be rainy.

If you want to see Madrid (which has winter - but is NOT arctic) I wouldn;t let a fairly minor temp difference between it and the south stop you.

See the New Year Eve in Madrid:
http://www.ctspanish.com/christmas/grapes.htm

Yes, i've read all about the 12 grapes, and even about the 4 higher pitched tones before the real 12 strokes of midnight. But what is an american to do while all the Spaniards are having big family dinners? Are restaurants going to be open on new years eve? Do i need to make a reservation?

The hotel restaurants are open for dinner and "cotillón" (New year party). Booking in advance is necessary.

You have to make a reservation at a restaurant and pay the money up front.We arrived in Madrid on New Years Eve morning and realised that all the restaurants were either closed or had this policy. We walked around until we found one that could fit us in.
We were surrounded by local families and had a wonderful set dinner with a sherry apperitif,wine with the 4 courses and champagne at midnight included in the price. I think it cost us 70 euros each. That was 3 years ago.
The grape thing was really difficult - especially as they were full of seeds!!!
The temperature was fine for walking around. It was so good walking through the streets on New Years day as it was so quiet.

I've been at Madrid airport twice in early January on the way to Tenerife and it's been around -5.C outside with lots of snow (and 32.C inside!)

I spent the month of January in Madrid in 2000. I didn't find it terribly cold, but I come from Spokane, Washington, where it can be very cold in January. There are sometimes winters in Spokane where the temp never rises above freezing, even during sunny days.

People in Madrid acted as if it was very cold, but I found it pleasant after experiencing December in Spokane.

Cold is a relative thing. I was in Hong Kong one January and on TV the travel guy said: Now temperatures have dropped to around seventy (70.F), now is the time to think of going to warmer climates.