Colonia del Sacramento, Uruguay is located 200 km/120 miles west of Montevideo, on the banks of the Rio de la Plata river. It's actually closer to Buenos Aires, which lies 50km/30 miles and a short one-hour ferry ride across the water. As such, it's a popular getaway for Uruguayans and Argentines.
Colonia has a long history. Founded by the Portuguese in 1680, it changed hands between Portugal, Spain, and Brazil over the next 148 years until Uruguayan independence. I recommend taking a brief guided tour of the town to get the full story. Or just absorb the history as you walk around the rustic old town (casco viejo or barrio historico in Spanish), designated a UNESCO heritage site. Warning: wear comfortable shoes and be very careful, as some of the streets haven't been repaired since the 17th century!
We recently spent three days in Colonia, which for some people may be two and a half days too many. It's a sleepy town which can certainly be visited in an afternoon - but for those who enjoy a slower place, Colonia and environs is a great option for a quick getaway or stopping point between Buenos Aires and Montevideo.
For accommodations, I recommend that you look into the numerous paradas or inns located in or very close to the historic quarter. We stayed at Posada Don Antonio, which is a lovely small hotel with very friendly staff and an impressive breakfast buffet featuring local products (try colonia cheese!).
There are also several good restaurants in town. One of our favorites, which is also an inn, is Charco. The food is generally local and the wine list features a good range of Uruguayan wines. You'll have a lovely view of the river and rocky shore. Meson de la Plaza is another good option, with a lovely patio in the back.
Take your time and stroll around the historic quarter, pop into the shops and cafes, or head over to the nearby beaches for a walk. A bit further afield is the town of Carmelo, with numerous wineries open for tours. If you don't have a car there is regular comfortable bus service between Colonia and Montevideo (see Buquebus, where you can also book the ferry to or from Buenos Aires).