I stayed at the "Auberge de Jeunesse" at the southern end of Rue Mackay. It's really close to the metro, Saint Catherine Street (downtown Montreal), and some good strips of bars and clubs. The hostel was really good and organised activities every day - so I'd recommend it!
Map link below:
http://maps.google.com.au/maps?f=q&source=s_q&hl=en&q=st+catherine&sll=45.494736,-73.575633&sspn=0.005483,0.016769&ie=UTF8&split=1&rq=1&ev=zi&radius=0.41&hq=st+catherine&hnear=&ll=45.494353,-73.571963&spn=0,0.016769&z=17&layer=c&cbll=45.494064,-73.573388&panoid=_Hv2jbzXnT5mlY5KenuWnQ&cbp=12,120.61,,0,0.16 about 9 years ago
I was going to recommend the same too. I've stayed there before and when I moved to Montreal I wanted to live somewhat near. It's a good area. Lots of bars, restaurants, shops, and the metro from where to can go everywhere else.
I think there are some other smaller hostels in Old Montreal and Le Plateau area, but I don't know much about them. Sorry. about 9 years ago