A small microfibre wash-cloth from the supermarket has excellent absorbent capacity and weighs very little.
Comments and current insights: I cannot see that I ever will carry a towel on most trips, simply because I do not need it. But sometimes it can be handy to be able to wipe condensation from the inside of a shelter. Or drying yourself after a shower (but where there are showers there are often towels to be had).
It irritates me a bit that outdoor stores sell piles of microfiber cloths for ten times what the same stuff costs in a gas station or supermarket. But it is of course prime evidence that the outdoor industry, like all industries, is profit-driven. Nothing wrong with that, but a smart backpacker need not believe everything that is claimed. And would rather spend his or her money on getting time off and going backpacking instead of buying stuff that is unnecessarily expensive. End of sermon. More in the book. :-)