We are huge fans of the Gatlinburg/Pigeon Forge area. I think that Xmas might be one of their prime seasons, but you can always find deals on cabins. Google Pigeon Forge TN cabin rentals and you will see TONS of them... many are rent 6 nights get one free, etc. There is plenty to do. Free stuff (hiking in the mountains, etc) and cash stuff (putt putt, go-karts, helicopter rides, and tons of theaters. If you have never been to one of the medieval times type places, then Dolly has one of the best, and their Xmas show is great! (and unlike some of them, so is the food). It's called the Dixie Stampede and it is WORTH it. Pigeon Forge and all of Sevierville is plenty close to Gatlinburg, plus a little less expensive. You can picnic lunch at a little park down in Gatlinburg next to a stream. walk around in the shops in G'burg, and also there is Ober Gatlinburg (ice skating and arcade is there... in winter you can ski too). EVERY store/restaurant has those discount coupons for just about everything, so before you pay, grab those things and flip through.. you can usually save a few bucks that way. They also aren't far from Maggie Valley and the casinos, etc. Most of the cabins have hot tubs and full DVD set ups, so you can cozy in and play boardgames and drink cocoa to your heart's content. Dollywood is a great amusement park, too. SEveral roller coasters (for the teens) and concerts, etc.
Have a great Christmas! (Wish I was going this year...)