What is "ugly sweater" in Xmas Eve?

It is that gift which suffices, not quite what you would buy and keeps you nice and warm... also 'homely' so the family feels comfortable and at peace.

Or.
The beast and your dads new wife or neighbor apparently.

Is the "ugly sweater" packed in beautiful wrappings?

There are whole websites and blogs dedicated to the meme, if you will, of the ugly xmas sweater, as seen above. They are the kind of sweaters you'd expect grannies and cat ladies to wear. People scour second hand clothing shops searching for the perfect ugly sweater. Then people go to parties and have contests to see who wore the most atrocious sweater, its just a goofy thing we people in the west do.

http://motleynews.net/2011/12/08/some-of-the-ugliest-christmas-sweaters-on-the-internet/

I knew that woman.

(sorry, Ceili, I know it's not original, but it makes me smile )

Made me smile too..