Kraft shop in Karlsplatz
U-bahn/S-bahn station...name escapes me at moment...basically under the Mathäser
movie theater. That shop is pretty good and has a good selection of all sorts of craft items. Another shop to look at would be Kaut Bollinger near Marienplatz
(Rosenstr. 8). Their craft items are on the top floor. Smaller selection, but worth a look. Oh, and the toy store at Karlsplatz (name also escapes me...brain malfunction today) also has a few craft items.
Edit: Obletter toys