Only one? That's about 10 too few! ;)
I've only hostelled in Paris, so I can't give you any personal advice in that category. You can check out hostels.com or hostelz.com or Student Universe or hostelworld.com">hostelworld.
As for places to visit, it would depend on three things: 1) where you are coming from (in your itenerary); 2) where you are going to
For example, I could suggest Strasbourg, but if you are headed towards Italy, a city in southern France would make more sense.
3) Your general interests. Do you like big cities? Quiet countryside?Do you want to hike a mountain or would you prefer a beach?
I understand the whole "stay someplace cheap" thing. But let's not forget why you're going to Europe - you need to enjoy it as well!
With some more information, I could give you some suggestions.