Madrid’s accommodation options run the gamut from luxury hotels to family-run pensiones and budget hostels where you can spend as little as 20 euros a person. Check TripAdvisor and momondo’s hotel search for hotel recommendations and book online for good deals. Consider staying in a hostal or pension to save money and enjoy a homier atmosphere.

This post has some good ones: http://www.notesfrommadrid.com/2008/03/12/where-to-stay-in-madrid-part-i-hostales