To stay in the colonial heart of downtown, I recommend the following hotels:
Mesón de Santa Rosa, Luis Pasteur Sur #17: Located on the Plaza de Armas, this is a wonderful hotel with great design and style. Centered around a beautiful courtyard there is a bar, the Josefa Downtown Café y Bistro, a living room or salon, and a lovely pool area.
Since my first visit to the hotel, they added a second location directly across the Plaza de Armas with more rooms, a bar, and a second location for Josefa Downtown Cafe y Bistro.
La Casa de la Marquesa: Located at Francisco I. Madero #41, is a beautiful old-world hotel with beautiful tile work, stained glass windows, painted walls, and antique furniture in downtown Querétaro. It was built as a baroque-style private home/palace in 1756 and became the residence of the Foreign Secretary.
Another good option includes the the small, contemporary MO17 Hotel Boutique at Melchor Ocampo Norte #17.
On my recent visit, I was excited to visit the Casona de La Republica Hotel Boutique. It is located downtown across from the Teatro de la Republica at Hildago 4. It is a lovely property with beautifully decorated rooms, a restaurant, and a rooftop bar with stunning views of downtown Querétaro.
A friend in San Miguel de Allende just told me about the Hotel Criol, which opened recently in the downtown area. It has a sleek, contemporary style. It has a pool and rooftop bar. Rio de la Loza Norte #6 a block from the Plaza de Armas. Chicago friends had a flight cancellation and were forced to stay in Queretaro. They also stayed at the Hotel Criol and thought it was excellent.