Just finished a project to control 14 different strands of Christmas Lights. Check it out and let me know what you think! Tim Leland - Developer | Blogger
wth..... 
Cool. I'm not sure I understand the ritual that that's a part of, but that's pretty cool.
I like how you kept it tasteful with all white leds (and not those godawful flickery ice-cold white LED lights that everyone seems to like now). Right now it looks like you change almost all the strings at once. I think with more software, you could get much more beautiful and exciting effects, like having the light "flow" up or down the tree. One of the nice things about incandescent lights is that they take a noticable amount of time to turn on or off, which would help smooth out a wave of light.
The purple lighting on the ceiling (unless it's an artifact of the camera) is ghastly. For ambiance, you can't beat the warm glow of some incandescent bulbs. I'd axe the LEDs and use a couple of large light bulbs, running at below line voltage using a variac to make it a warmer, yellower light (or you can control with arduino and dim with a triac like usual for AC dimming, but that's a bit more work. This would be pretty cool in that setting, I think).
You might also be able to get some milage with LED strip. I think the individually addressible kind would be to gaudy and flashy, too las vegas, for your purposes (though it's incredibly cool). A strip of RGB light strip, under the rim of whatever they're all sitting behind (pointing down - indirect lighting) would look great. You could keep it off most of the time, and then for emphasis, dim the light behind the tree (prev. paragraph) and and turn on the strip to bring the attention right onto the tree.