Maybe a piece of art like this bear head is what you need?

Mosaic design - add mirror tiles in the mosaic

I recommend a beautiful tile such as Anne sacks in one of the artsy designs in a sunburst of colors. It will cost a bit but would be a good use. I wouldn't put anything in it.

Forgo anything which may be permanent. What about trompe l'oeil? Find a GOOD mural artist & have them paint a beautiful iron scroll design. They can creat a design to fit the space perfectly. You won't have to worry about any maintenance or removing it to sell the home. Need to change it? Simple paint will do the trick.

I posted before and after photos of a similar situation in this blog post: http://devinedecoratingresults.com/2010/07/08/tips-and-tricks-for-decorating-with-tall-and-low-ceilings/

The tuscan/scroll/mural/words ideas are very "year 2000", don't do those unless you are really wedded to those design trends/fads.

you could paint the inside "frame" of it...the 4 inch(?) indentation a color that marries the other colors you have chosen..then leave the inset the color it is OR paint it or TEXTURE it with a venetian plaster /color look. ..sort of a patina? Maybe do the entire wall there?? It would accent your room beautifully.

I agree with left47, just cover up that niche! When you repaint, you can have it drywalled. In the meantime, I would definitely add large artwork to complement your gorgeous turquoise rug!! Where did you get it, I would love one for myself and the size and shape of it is perfect for your sofa.

I just have to add one more thing. In the design world, NICHES are now dated! I can't tell you how many designers I know that are battling the builders on this issue. To think, people are paying a lot of money for these when it's so unneccessary. These niches are hard to work with, I should know because I have 3 of my own! They are not an architectural feature and they make it difficult trying to find the "right" piece to fit in there. You do not want to call attention to that niche at all. Your furnishings are beautiful and you obviously have great taste. Bring in those green and orange cushions and also don't forget to repeat the turquoise.

If you have a photo or artwork of particular interest to you, you can have it reproduced on tile. Both examples here are from clients' vacation photos reproduced on tumbled tile, although they could as well have been printed on ceramic or glass tile. One is from Lake Como, Italy and the other from a Japanese garden.

I'm with Laura, that niche is a weird height and you should cover it with a beautiful piece of large art work. Check with local shops and artists, you will probably find something you love and a really great piece is worth the splurge! It will inject lots of personality into the room. I always prefer when the TV isn't the focal point in the room. A big canvass that covers the niche will eliminate that, and bring the focus back to the fireplace!

I agree with Carolyn, it's too high to work with and is anything but classic. http://www.mariakillam.com/2013/01/classichouse.html/ Drywall is the only solution here. Maria

A cheap fix: try a shallow, arching natural branch, dark bark or stripped bare. It would be a natural element, that would be a minimalist nod to your modern aesthetic and wouldn't cost anything, or barely so if you buy a branch. It would take the design focus off the TV and draw the eye up into the space without screaming "look at me!" One or two finishing nails would easily hold the brach in place, just be sure it is shallower than the depth of the niche and roughly fills the niche's space from top to bottom. Good luck.

Perhaps you should drywall it and not make it a focal point.

Have to agree with Rita and drywall it and others who say cover with art.

I would either "go big or go home." By that I mean, I'd either paint it a contrasting color and add a HUGE wrought iron sculpture. I liked the idea of the bear but not the actual bear. Go for something abstract but definitely 3D and BOLD. If that doesn't fit your style I would wall up or cover that sucker in a heartbeat. It depends on whether you want to draw attention to your remarkably high ceilings or keep the focus on your furnishings. Personally I'd go with the bold statement but that's just me and it's definitely not for everyone. If you do something though, it can't be half way or it'll look very odd.

since its not too deep I would do something like this
http://www.google.com/search?q=niche+decorating+ideas&rlz=1C1CHMD_enCA371CA371&aq=0&um=1&ie=UTF-8&hl=en&tbm=isch&source=og&sa=N&tab=wi&ei=GQYhUbL8EeibygHluYCwDw&biw=991&bih=702&sei=NAYhUbnxH-TYyAGxwYAo#imgrc=axvHWvvITfkbcM%3A%3BH4AUKVf5KzF2YM%3Bhttp%253A%252F%252F2.bp.blogspot.com%252F-44YWj12sWvI%252FTk1HxGAz4bI%252FAAAAAAAADLc%252F_3EOsT9LBQI%252Fs400%252F121940676_zqLaiZ0M_c.jpg%3Bhttp%253A%252F%252Fanythingologyblog.blogspot.com%252F2011%252F08%252Fhow-do-you-decorate-wall-niche.html%3B370%3B370

I love, love, love your couch and rug combo! I agree, niches are dated. Just cover it up or get rid of it, or at the very least leave it alone and don't draw attention to it.

I would consider filling it in with drywall and bring the focus back on the fieplace. Please reconsider replacing the rug or removing it all together in place of an ottoman or round glass coffee table.

Drywall the niche and keep the rug. It rocks!

If you plan on placing artwork of some kind on that tall fireplace wall..then don't go to the extra expense of drywalling it in and all...why not just decide on a kickbutt piece of artwork (does not have to be a painting ?) that is large enough to completely cover the "niche"?

I see I'm not the first person to immediately think "Hire an artist to paint a trompe-l'oeil in the alcove." However I would have them paint a view of your imaginings of the inside of the fireplace, perhaps with a squirrel's nest or a few bats hovering within a trompe-l'oeil niche inside the fireplace for humor. Or cover it up. I agree with the others; the niche thing is outdated and screams "real housewives of New Jersey-aspirational" to me.

put a huge painting over it.
or re-sheet rock flush, and then put a huge picture over it...
it is out dated...80's

I would do a custom art panel fresco laser cut from steel, pinned off the wall and back lit from the bottom. The art would be designed to suit your specific tastes. Of course I am biased to my own work.
See one application of our art panels pictured here...

I would suggest painting the whole space and have the niche painted an accent color. This would be the least complex solution. However, I would suggest drapery, accent pillows in the the same shade or with similar pattern. Then pick a matching wallpaper for the niche. You can also hang art work there (with or without wallpaper) or maybe even a decent size wall scone if you can get an electrical outlet there. If not, then some sort of wall accessory that has dimension and texture to add some interest to the space.

I love the idea that "dakgirl77" had with the stacked tumbled travertine. It ads texture without imposing on anything else as though the house is coming out of it. Limestone is another stone you could use. Check out the Herringbone pattern behind the stove on the picture below.

Oh my! So many ideas..
I will go through each and every comment and then will decide what to do! The rug will definitely stay and I will add pic of sofa with accent pillows very soon. Thanks to all who took out time and provide and came up with their valuable suggestions!

I would have a glass/mirror company make you antiqued mirrored tiles to fit the nitch. At each intersection of the tiles, i would add a small metal element. Since the tiles are antiqued, it doesn't really matter what they reflect because you won't really be able to see anything. I like the idea of a little glam because you have modern furnishings for a rather traditional element. I would also consider painting your walls a warmer shade of tan.

@Milne well dressed homes: thanks for the input. Glad you liked the rug. I ordered it at one of the rug store in Houston. They had to cut the large rectangular rug in a round shape.

Some more views of the room.

And more

Have a mirror cut to fit exactly. It will give some life to the room without drawing attention to it. Then you will be free to add whatever you would like to your mantle, which will draw your eye to the fireplace, where you want it. And if you want to change your mantle seasonally, you won't be competing with something too busy.

I absolutely LOVE the color of the turquoise rug with the dark brown of your sectional. I would cut a sheet of plywood (not too thick, just sturdy enough to handle tiling it.) the dimensions and shape to fill the space. I would then go tile shopping with your rug and a paint chip(s) to match the beige of your carpet and the brown of your sofa. Sketch a design that you like, making the turquoise the accent color as you did with your rug. After your piece is grouted and finished, put it up with screws through grouts areas (so they can be retouched and made invisible), preferably through studs. (Use a couple of wall achors if you can't find studs) Now enjoy the custom piece you have designed and made. When you are ready to change your room a long time in the future, unscrew the screws and take down the piece and design something again if it doesn't "go" with the new room design. By the way, I would not worry about detracting from the tv. The tv should not be the focal point anyway and is pretty boring t look at when off!

I would most definitely NOT cover up the niche. Unless the TV to the left is going up be huge, there is no reason to think that it will clash as some others suggested. The fact it you have a huge volume of space there and it will hold up to some strong accents. I would treat the nich as a canvas. Don't hang art over it....Make it art. There have been several good suggestions, metal art, mosaic tile(my favorite), wallpaper...it doesn't have to be super expensive either...make it a statement about you and your life ! Most of all, have fun with it and don't take it too seriously !

The uber modern circular turquoise rug over top standard wall to wall carpeting in a house with psuedo "old world" niches doesn't work.

The niche looks too high to cover with art or fill in with a mirror, and I would for sure stay away from the tuscan/mural/words suggestions. If you are planning to keep your white walls, go white-on-white with a statement piece like the large antlered moose head from Z Gallerie. Now that's a wow factor! (Sorry, couldn't get the image to attach but it's easy to find at zgallerie.com AND it's on sale now.)

I found the pictures of the moose head from z gallerie. Its a good option however I don't think they are big enough. The picture below (top right) shows them grouped together but for this application you would need just one big one. A grouping of them I think would be too distracting. I do like the idea that they are white or metal instead of using a real one. With your modern coffee table a metal one would look good.

It was probably mentioned prior, but trimming the perimeter would add a finishing touch!

Find some unpainted flying geese, paint them an electric color and have them spilling out of the niche on to the wall in an upward flight. You can paint the inside of the niche to look like the sky. Art in flight!

I'm sorry to interrupt, as I bring no actual help, but I think we should all take a moment to appreciate Trouble Free Electric's comedic relief further up. I couldn't help but laugh when I got to it. Way to promote their products. No offense intended, I just think it was funny (and I like the idea too even, should you decide to put a painting inside the niche).

Anyway, I'm not traditional either, so the suggestion that it be covered with a large painting speaks more to me than accentuating it.

Finding anything with the same degree curve at top, along with right amount of space between sides and bottom is incredibly difficult. If you find it, paint niche a different color. Otherwise, it's a big space, a large piece of artwork to cover it would be best, but definitely paint the whole thing an accent color.

I wish I would have gotten as many suggestions for my design dilemma as you have! Great ideas everyone!

take the arch of it and fill in sheetrock to form a rectangle then follow some of these great ideas. some times builders toss in dieas tht nothing to do with the stated architecture.

I would paint it the color of the rug, even in a lesser shade if you want? Then put art there with a bright pop of color. I have no business sharing an opinion as I am in no way a decorator. I can just see it looking good. Also adding some little pops around the room from the color(s) in the art.

If you could add a wooden frame in it, it would look fine.

Thanks each and everyone for their ideas :)
Will soon get back to show all of you new look of our family room..

Please also visit my new post .. I need suggestions.. Will have to finalize in a day..

Here is the link
https://www.houzz.com/discussions/which-color-goes-well-with-eros-pink-dsvw-vd~362894

What about painting just that entire wall around fireplace(including niche) turquoise to tie in your rug and pop your mantel- the niche is really high to do to much with, you could get an expresso piece to go under the tv to hold components and such on that wall to left of fireplace and use a bronze piece in the niche itself and tie it together with matching candle sticks on mantle..

Not sure how deep this niche is but you could add a decorative tile inside with either a pot light or a picture light highlighting either a sculpture or floral arrangement or ad a large unique sconce or candle sconce.

There are so many beautiful tiles out there right now too, this is the perfect opportunity to choose that gorgeous tile that you would never be able to afford to to your whole shower in!