Kathmandu's central Thamel district is a clearinghouse for anything that can be purchased in Nepal and is the natural place to shop, but there are several other areas that specialize in specific crafts. (Since October 2017, downtown Thamel is car-free, which makes shopping here much more pleasant than before.) Just be mindful of those 500-rupee pashminas -- some deals are too good to be true!
For the best selection of thick, colorful and hand-knotted Tibetan-style wool carpets head to the Tibetan refugee workshops in Jawalakhel in southern Patan. Patan is also known as the very best place to buy Buddhist statuary, and the backstreets are lined with metal workshops.
Fair Trade Shops (Durbar Marg, Lazimpat, Patan)
Nepal is a leader in fair-trade shops, which market and sell handicrafts and design products from women's groups and other responsible sources. The Kupondole hill leading to neighboring Patan is a hub for fair-trade design shops, including the excellent Mahaguthi outlet, but there are also several stores in Lazimpat in northern Kathmandu.
Closer to Kathmandu center is One Tree Stop on Durbar Marg, a tiny shop which nonetheless offers an ever-changing selection of unique crafts made by local artisans and designers. The cafe upstairs offers employment to deaf waiting staff and is a great place to refuel when energies start to flag. (It's similar to Patan's The Local Project, which is conveniently located next to the hip EVOKE Café & Bistro.)
Katheshimbu Stupa (and Boudhanath Stupa)
In Kathmandu, you'll find the best selection of Tibetan prayer flags, brocade and embroidered silks at shops around the Katheshimbu stupa, just south of Thamel. You can even get a tailor to make you a set of Tibetan or Sherpa traditional clothes here. (You can do the same around Boudha, too, where many Tibetans and Sherpas reside.) Top this off with a traditional Nepali topi hat at the nearby cluster of shops at Kel Tole. Finally, the colorful local market at nearby Asan Tole is the most interesting place to pick up spices and is a fabulously photogenic place for an early morning stroll.
The nicest mall in Kathmandu, Labim Mall opened on Pulchowk in Patan just after the earthquake. Inside the 5-floored, 200,000 sq ft complex, you'll find popular restaurants like Roadhouse Pizzeria and Le Mirch, along with Western shops like ESPRIT and GEOX, as well as many local brands. Beyond the shops, Nepali celebrities and elites flock to LEVEL 3, a rooftop terrace bar and lounge, on Wednesdays and weekend nights. And if you're in the mood to see a movie in comfort, head to QFX Cinemas, which has plush stadium seating.
Baber Mahal Revisited
Finally, if you are in the market for higher quality crafts (at higher prices), it's well worth taking a taxi to Baber Mahal Revisited, a restored Rana-era palace complex stuffed with beautiful handicraft and clothing boutiques and featuring some excellent restaurants (like Chez Caroline) as well as a boutique hotel. It's located near the Singha Durbar government offices.