I've tried on many many occasions to capture the feeling of a town spreading across steep slopes, and I know it's very very difficult. The best suggestion I can offer you in terms of the design/layout is to look at Italian hilltowns, like Riomaggiore, Montepulciano and San Gimignano.

As to how to map it effectively, I hope you find a good method and share it, because I'd love to get some inspiration for how to solve this problem myself...

Wingshaw