I, too, have heard lots of recommendations La Carboneria, in Seville. I've never been, but I did go to a small bar in Plaza Santa Cruz, called El Tamboril.

We went in at midnight. Gradually, flamenco musicians drifted into the back room, and the barman urged us to go and sit among them if we wanted to listen. It really was magical. The guitar was passed from hand to hand around us, and as more people arrived, there was impassioned singing and playing, and a few people would get up to dance. (Are those the dances they call sevillanas? Someone more knowledgeable than me will know.) We did our best to join in with the "palmas" handclapping rhythms. We stayed until about 3am, and when we paid the drinks bill thought the drinks were a tad expensive - but later reflected that we hadn't paid anything to go in, and if it helped buy a few drinks for the musicians, we had no problem with that.