Hmmm, what an interresting and fun prodject to do. I am first jealous that you have the space for such an endeavor.
First off, you have picked a great time of the year to do this. Like you mentioned using christmas lights... I would look for those at the craft stores that would be used for the mini town sets.
I have these spot lights. They are very useful. Other kits that I have found interresting are the micro light strips, these aren't the best product pictures but...
I have found them at Kmart or Micheals Craft store.
Just to note for Dio pictures, you won't be able to show the lights flashing, that would be more of a photo shop addition.
Hope this helps some, good luck on your Project!