Finished my 8 days in Oaxaca, and thanks to the excellent info from RST, et al, and the generally good food available, I ate very well indeed. In the spirit of giving back, and in no particular order, here are some notes that might be of use or interest to others.
The hot, upscale, restaurant in Oaxaca is the Casa Oaxaca (Garcia Vigil 407, 3 or 4 blocks north of the Zocalo). If you want to go, however, reserve immediately. We made the mistake of waiting until Thursday to make a reservation for Friday, our last night. No luck, so this report is only passing along the reputation. Having said that, numerous people told me it is the best place in town.
Going to the other extreme, we found a little place on the north side of Matamoros just east of Garcia Vigil called La Tentacion. Just a few tables in a covered court (very utilitarian), which serves wonderful breakfasts for 25 pesos (less than the Fondas at the markets, more on that below). Fresh OJ, best breads I had in Oaxaca, fresh fruit cup, cafe con leche with nice touch of cinnamon, and a wide range of main dishes, more breakfasty than in the markets, from eggs any way you want, to queso fresco in salsa to frijoladas. Just a young guy and his wife, and very pleasant.
Other fun eats included the food stands on the street just north of the main market (Mercado Jaurez, just south of the Zocalo), which served lovely tacos and pozole in the evening. Maybe it was the season, but there were very nice white onions everywhere, and lots of places grilled them and then served them just sliced in half which made a nice side to the tacos for some of the family, while others liked to put the grilled onions on their tacos. In the same theme, in the Mercado de 20 Noviembre, which is the food market just south of the Mercado Juarez, if you take the northernmost entrance on the east side, you enter an aisle off the the side of the main market where little meat stands alternate with braziers. You pick the meat, they grill it, and there are other vendors who sell sides to go with it. We did not get to try this (because of a negative experience at another place in the market, and my family refused to go back, oh well), but it was generally very busy (mostly with locals, particularly in the evening) and looked quite good.
Continuing with the market theme, the big market at the south side of town, Abastos, overwhlemed us. There sure was a lot to see, explore, and eat, but I spent at least half a day there on Saturday and never could get it. In general, we all preferred the neighborhood markets, and the weekly markets in the little towns around Oaxaca, which one can easily get to via bus, or taxi (they will gladly give you an hourly rate). As we were 4, the taxi option worked very well.
Last market item - the neighborhood market that is between Tinocos y Palacios and Porfirio Diaz a couple of blocks north of Allende, I believe (maybe 6 blocks or a little more north of the Zocalo)is wonderful for food. There are about 8 fondas, and then maybe another 12 or more tables preparing food. It was recommended to me by RST on the board (I will add back that link on the next posting), and others recommended it as being noted in town for food. The quesadillas and empanadas were great as RST said, but I also ate breakfast a couple of days at the Fondas, and generally was treated very well, and ate well. On Friday, there was a row of tables selling fish, fresh and also fried right there. I did not get a chance to try that, but would like to next time. Might have been something for Easter, don't know.
This may be obvious, but I had to learn two things about proper market behavior (besides wear long pants, a white shirt and try not to look too much like a gringo touristo lout - once I did that, I discovered people greeting me on the street and the whole dynamic changed - I know this is pretty much always the case in Latin America and much of the world, but somehow I do need to be reminded). There really was not that much bargaining unless you were buying something fairly expensive (100 pesos and up), which seemed different. And I found I did better by asking the vendors what they had that was good or different, rather than telling them what I wanted or pointing. This worked even in my broken spanish, and I got much better stuff as it engaged them. Of course, on the food side, it did run the risk of them giving me the standard stuff for gringos, but I could always ask for something mas interessante, or mas picante, and it worked okay.
To be continued with even better food shortly.