Hotels in Sydney are pricey. My favorite location is close to Circular Quay because it's the easiest access to transportation, train, busses, ferries, and there are some excellent restaurants in the area. Darling Harbor is also a good location, but not as convenient as CQ in my opinion.

Optimal location might mean The Rocks - that's the historic old part of the city and the focal point for many tourists, but it's also expensive. I would also consider Circular Quay (next to The Rocks) as a good location. You might also look around the main shopping area (Pitt St - George St - Queen Victoria Building) - close to Town Hall station as a good and handy location. An example of such a hotel might be the Grace Hotel - I think that would be sort of your budget. If you think that's still too expensive, the area around Central Railway has a number of less expensive hotels and hostels in the area (for example, The Marque hotel) (note that you are getting further away from the harbour and the Rocks / Quay area). From Central you can hop on a train to Circular Quay for the harbour, Town Hall and Martin Place for shopping, or take the light rail (tram) to Chinatown and Darling Harbour.
For good prices on hotels use www.wotif.com - many locals use this consolidator.

Lavandula

Check Wotif and GoStay to find something in your price range:

http://www.wotif.com/
http://gostay.godo.com.au/

Circular Quay and the Rocks are popular areas to stay. Darling Harbour is a tourist trap and not great for public transport, but some hotels listed as Darling Harbour are actually in Chinatown and quite well located (if locating them on the map they will be on the city-side of the harbour).

You could stay towards central station, the hotels are cheaper at this west end of the city. Friends have stayed at Marque in Quay st, and Vibe which they found reasonably priced and clean and pleasant. You are also then within walking distance of some great restaurants in Surry Hills, and East Sydney.

Whoops, posting at the same time, sorry Lavandula replicating your advice!

I stayed at a hotel in the Rocks in December, 2012, and, as I said in earlier posts, I recommend highly the area and the Russell Hotel. Check out what I've written previously. ZZ

DH and I stayed at the Park Regis in the heart of Sydney last October. Was reasonably priced, very clean but ask for an executive room - they are larger than the standard rooms. The other bonus for us was the fact they had windows that actually opened! Was hesitant at first after reading reviews but in all honesty we will stay there again as it is so central for the free shoppers' bus, the monorail, and the great shopping areas, as well as Hyde Park. We looked out our main room and bathroom windows towards the park! We were on 10th floor.

We stayed at Rydges World square 389 Pitt Street, Sydney, NSW 2000 a while ago.
Not in the thick of tourist areas, but right on the monorail and we found in very comfortable and brilliant value. location isn't everyones cup of tea I suspect, but it was fine for us.

Generally Rydges seem to be pretty good value in my experience.

Muck

>Not in the thick of tourist areas, but right on the monorail

Soon this won't even be a feature .... the monorail is going to be pulled down. It's been controversial since its opening, and often criticised for not properly contributing to the public transport options that the city has (that is, it really only goes to Darling Harbour and is not actually useful for most commuters, even if tourists like it). Now there is a tram that goes to DH, from Central, and the city is now also planning to put a light rail system down George St and out to University of NSW. Not that this replicates what the monorail did, but it will certainly be a good thing for lots of commuters - the route out to UNSW represents hundreds of bus-travellers.

World Square is between Central and Town Hall - to me Town Hall station would still be convenient, and is close to Chinatown and Paddy's Markets, so not such a bad location after all.

Lavandula

Thank you everyone. I guess I have some research to do now....

Gatorman

Have a look on "wotif" at the Travelodge, Wynyard. Wynyard is about half way from Central Railway to Circular Quay. The three day stay is a bargain at the moment. for Sydney.
My son stayed there last year, and said it was OK. It's right at a railway station, so you can get a train from airport to Central, maybe even all the way, but you may have to change at Central.
Personally, I think I'd risk a five star on wotif at a good price. You can see what you might get, by looking at what's available and where they are. Good luck.