I just had a blast doing a 4-yr-old princess tea party for my daughter this summer. I was able to keep the cost way down too. Ours was outside, but you could modify it.
For the invitation, I found $1.00 small wooden hinged boxes and put inexpensive pink jewels in them along with a rolled up and tied invitation that said something about...you're invited to a royal birthday tea party...feel free to come dressed as a princess! My daughter painted and decorated the boxes with glitter and stuff. We passed the invite boxes out. (We invited 4 girls) The girls absolutely loved them, and we had lots of fun making them together while we talked all about the party.
For the activities at the party I made stations around our yard by laying out big floral sheets. 1. One station had all princess books from the library and princess puzzles and paper dolls that we had on hand. 2. One station was a standing mirror that I actually bought for the party at K-Mart ($5.00) draped in dollar store flower vines with some dress-up items (clothes and jewelry) in a trunk next to it. 3. Another one was dollar store wands (like 6 for a dollar) that they used to run around with to pop bubbles from a bubble machine in our tree. (Absolutely adorable...best pictures of this one) 4. Another station had a princess craft...create a foam picture frame. (Michael's was selling a tub of like 40 mini princess magnet frames with stickers and jewels to decorate for around $7.00 on sale) We took pictures of each friend with our daughter and put the picture in the frame.
I figured games would be hard at that age, and the freedom to roam around and do whatever worked out really well.
To decorate the table, I taped white paper doilies all over a dollar store tablecloth. Each girl had a paper crown, party favor cup and pretty tea cup and saucer (with lemonade) at their seats. For lunch I cut cantaloupe and grapes to look like a flower, filled a reusable flower cupcake holder with mac-n-cheese so that the yellow looked like the center of the flower, and also had baby hot dogs wrapped in crescent roll dough all arranged on individual plates for each of the girls. For dessert we had cupcakes in the same flower holders and rice krispy treats cut out with a flower cookie cutter. I put each one on a long wooden skewer to look like real flowers and served them from a flower vase.
A nice table centerpiece can be made using a disney princess gift bag. I always see the one of a castle that has doors that open on the front. You can put a vase of flowers in it so they show out the top.
Our favors were in decorated pink dollar store paper cups. We filled them with dollar store jewelry sets, colored pens and little notepads....Like $2.00 per child.
It was so much fun and as you can tell, the dollar store had lots of princess party items and other things that worked out really well. It made for a really cheap party. I'm sure we spend less than $50.
Have fun with all the great ideas you've been getting...and if you can, update everyone so we can hear how it went!