I stopped using cloth hand towels about 5 years ago. I really don't consider myself germ-phobic, but think about it, a cloth towel is just a breeding ground for germs. When I painted my powder room last year, I didn't even put the towel rod back up. Instead, I have the paper hand towels for guests. Upstairs, in the bathroom, I have kept a roll of paper towels on the counter.
While I know this does nothing for my carbon footprint, I do have a couple of pluses in my favor. First, I use the select-a-size rolls where you can tear off half a sheet. Also, in the past year, I made the switch from plastic water bottles to one stainless steel bottle. Considering I drink a lot of water, I have drastically reduced my use of plastic. Further, I have also cut down on the number of baggies I use for school/work lunches opting instead for plastic reusable containers. Lastly, I made the switch to CFL bulbs throughout my condo, and installed a low-flow showerhead. Rationalization at its finest.
Just lately, I replaced the roll of paper towels with the new Kleenex hand towels. They are even packaged in a nifty box that you can set upside down on your towel rack for handy dispensing. Cute, right? Now why didn't I think of that??