The Christmas market is lovely - it is one the promenade, and although you have to avoid the mulled wine, you can have those lovely german sausages instead.
The Hotel du Vin is lovely, very close to the centre of town so you are within walking distance of everything.
I used to live in Cheltenham, and I would recommend 9as it so bloody cold at the moment) just ambling around the shops (The Promenade and specifically Montpellier area have lovely shops) and looking at the lovely architecture. Avoid the High Street as it is like any other High Street in England and will be mobbed at the weekend.
The Daffodil is a lovely restaurant - really beautifully done out (used to be a cinema) and the food is great. For lunches I can recommend Brasserie Blanc, which is in the Queens Hotel at the top of the promenade, Montpellier Wine Bar (Montpellier), and the best curry house in the whole world, Curry Corner (featured on Gordon's F Word couple of weeks ago) in Fairview. Also there is a Zizzi which is just normal pizza/pasta, however is housed in a beatifully converted church and has a great atmosphere.
They have a theatre but I think it is stuck in Panto mode at the moment. The cinema is in easy walking distance of hotel, just at the back of the High Street in a place called the Brewery complex. There is a bar called Apres next to the cinema, avoid going in there, it gets a bit rowdy.
Sunday lunch if you are there, there is a place called Hotel on the Park near Pittville park which does lovely Sunday lunches. Ditto a nice pub called the Langton (you will have to get a cab there as is a few miles out of town).