So often I am asked where to stay in Key West. You can choose from Key West Hotels, Bed & Breakfasts, Motels, and Resorts: they are aplenty on our little island. Beachfront full-service hotels are available and usually pricey. They include the Reach Resort, the Casa Marina Resort, and the Pier House (harborfront). I wouldn't stay at the Hilton because the cruise ships dock there and usually block your view of the water. Key West B&B's are a really nice option, nestled amongst the historic homes of Old Town. My favorites include The Mermaid & The Aligator, The Island City House, and La Habitacion. One thing you really want to avoid is staying in New Town (the east half of Key West) if you want to spend most of your time in Old Town/Duval Street/Mallory Square. But you can get a cheaper room in New Town.
The Merlin Guesthouse on Simonton offer inexpensive and clean rooms with a bit of Key West charm. Plus it's right in the middle of the historic area.
I'm off to go do some of that famous Key West fishing.