Hostal Amaru is my top recommendation. I´ve stayed there twice and that´s where I will stay on my next trip, too. It´s in a very good location. If you stay here, be sure to look at the available rooms as they all differ. It´s an amazing value for the price, check their web site for details. Just thinking about this place brings back wonderful memories.

I´ve also stayed at Casa de Campo, which is also a very nice place and probably has one of the best views of Cusco. However, it´s a long walk uphill and once you reach the hostal, you have to walk up a lot of steps to get to the rooms. At altitude, that may or may not be a problem for you, but something to consider. The quality of the rooms are about the same as the Amaru, which are actually quite nice considering how little you´re paying.