Judaica, from chintzy souvenirs to fine art, can be found in the Jewish Quarter and the Ben Yehuda Pedestrian Mall. You'll find everything from Hanukkah menorahs (nine-branched candelabras) and Seder plates for Passover to educational children's toys, jewelry, kipot (skull caps) and Jewish-themed art. Colorful Jerusalem candles and skin products, featuring mud from the Dead Sea, make great gifts for the non-religious folks on your gift list. In Bethlehem, look for olive wood carvings and mother-of-pearl handicrafts, many with Christian religious designs.
Keep in mind that stores may be closed for the Jewish Sabbath, observed from sundown Friday to sundown Saturday.
Head downtown to the Ben Yehuda Pedestrian Mall for shopping and cafe culture. The midrachov (pedestrian mall) is formed by the triangular intersection of Ben Yehuda Street, King George Street and Jaffa Road. Cafes, touristy shops and fast food joints (everything from American chains to falafel sellers) attract locals and visitors alike. Have a wander, or enjoy the buskers. Don't worry -- everyone speaks English there, even though the street is named after the man who revived Hebrew as a spoken language.
For a true taste of Israel, head to Mahane Yehuda Marketplace, affectionately known as "the Shuk," one of the largest and busiest open-air markets in Israel. Vendors sell all kinds of foods, and the market is a melting pot of shoppers, representing a host of nationalities, religions and demographics. Come here to immerse yourself in the sights and smells, or grab a quick lunch of falafel with some rugelach (rolled-up cookies, typical of Eastern European Jews) for dessert.