I like to stay in HuaQiao Hotel "杭州华侨饭店
http://www.allybook.com/hotelinfo.asp?hotel_id=310043
Although a little old, it is facing the water on the east shore of Westlake. From the hotel you can walk northbound along the water and do the westlake tour on foot. Service is also good. After check in, the floor staff will serve tea and biscuits. Rooms are spacious. There is a 24hr mini mart in the same building. It is also right by grand Hyatt and on the street between hyatt and this hotel, there are quite a number of good priced restaurants with good food. It is also walking distance to shopping, fine dinning. Right infront of the hotel is also a bus stop where you can alight (number K-2 I think), The bus starts at Linying temple (one of the attractions), will pass by (and stop) at YueFei temple and at this stop. Cost 2-3 RMB per pax. So it is very very convenient. The hotel room is around 380 RMB a night for a standard room (2 single beds). If you want the lake view, it will be around 450 RMB. Prices do fluctuate a little across seasons.
If you want cheaper hotels you can also check out
http://www.ctrip.com, a chinese booking site where most of us use.