My church used to put on a holiday party for a HeadStart preschool every year, and we'd always have several crafts for the kids to make. Some have already been mentioned, but a few more:
Stained glass (or suncatchers): I don't have a picture, and I don't have the materials to make one, so I'll try to explain this one. Cut squares of clear contact paper, and cut lots of small shapes of tissue paper in various colors. Have black paper and templates (bells, stars, balls, etc.) available. People select a template, trace onto the black paper and cut out. Then they need to fold in half and cut out the middle so the black paper forms an outline. Peel off the backing to one square of contact paper, and put the outline on the sticky side. Then fill in the outline with the tissue paper, trying to fill in the entire outline in one layer. Little kids tend to just clump the stuff on, but that's OK. I had some teenagers spend a long time on this, though. Then peel off the backing of another square of contact paper and put that on top, sticky side down, and cut out along the outline.
Beaded stars (or snowflakes): these were VERY popular, but they don't take long to make. Most people (including adults) would make several. I took a picture of one that I made this morning. The arms are made with metallic chenille stems, and the beads are translucent pony beads. If you buy the beads at Michaels, it might get out of your budget, but there are places on line that are much more economical to buy in bulk.
We also did little felt ornaments, like simpler versions of this: http://www.craftster.org/forum/index.php?topic=207785.0
If you buy the felt by the yard, it's pretty cheap, and a bag of fiberfill goes a long way. We did very simple shapes - again, stars, bells, balls. Someone had a lot of crochet thread that we used instead of embroidery floss, don't know if that would have been cheaper to buy, for us it was free!
We'd also get a bakery to donated already baked gingerbread men cookies, and have lots of decorating supplies available. We couldn't have done that without the donated cookies, though.
There have been some great ideas on this thread, I'll be keeping them in mind in case I ever do a party like that again. Have fun!