SciFiVille
Space Craft
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Madrid
This is by no means an exhaustive list. I recommend that you call these stores to check opening hours and to see that they still exist before you make your trip. Stores that I've visited are in bold.
Yarn
El Gato Negro ("The Black Cat")
Plaza Mayor, 31. (Metro: Sol)
This is a traditional shop of Madrid, from the 1900. Beautiful.
(Review by Carmen)
ElCorteIngles:
This is a big department store that have a lot of shops all around Madrid, but the best one for wool is in the following address:
Paseo de la Castellana, 124 28046 MADRID
This is one of the main streets of Madrid, so if you ask for the shop, everybody is going to tell you how to go.
(Review by Carmen)
Fabric, Beads etc.
In the street called "Pontejos", in the centre, near La Plaza Mayor, there's a lot of different traditional shops (fabrics, buttons, threads*), there must be wools and yarns.
(Review by Carmen)