Boston! (No, I'm not biased because I went to school up there and am dying to move back. I don't know what you're talking about.)
Boston is a pretty city, clean, has good public transportation (seriously, don't drive in Boston. EVER. Take a cab or the T--that's the subway system. I repeat: do not drive in Boston. Between the bad drivers and the crazy street layout...just don't.) and is a good walking city--it's got a small town feel, and it's not hard to walk around, plus you find neat stuff!
I didn't start knitting until after graduating and coming home, so I can't comment on yarn stores, but I'm sure they exist.
And Boston has easy access to lots of pretty places where you can see the leaves--Salem is gorgeous and FUN in October, and Walden Pond is really pretty (where Thoreau used to live.) You will need a car to get to Walden, but the commuter rail goes to Salem. It's also not far to get to other New England states--1 hr to southern Maine, an hour to CT, 45 minutes to Providence, RI. Not sure how far to Vermont.