Ruby 1.8.7, 194 chars
n=2*gets.to_i-1
r=n**2
l,c=[nil]*r,r/2
r.times{|i|l[c]=i+1;c=i==0||l[c-n]&&!l[c+1]?c+1:l[c-1]&&!l[c-n]?c-n:l[c+n]?c-1:c+n}
r.times{|i|print"1"*l[i]!~/^1?$|^(11+?)\1+$/?'*':' ',i%n==n-1?"\n":''}
For some reason, ruby1.9 wants another space on line 4:
r.times{|i|l[c]=i+1;c=i==0||l[c-n]&&!l[c+1]?c+1:l[c-1]&&!l[c-n]?c-n :l[c+n]?c-1:c+n}