I have been to Arcos twice (1997 and 2000) and stayed both times at El Convento, a beautiful small hotel which (going from memory was about $100 Canadian - about $60 or so $US I guess (double occupancy). This web site has a photo from one of the terraces there: http://www.highonadventure.com/Hoa98jun/Arcos/arcos.htm
I recently discovered this site for another hotel there, which also looks great: http://www.lacasagrande.net/
If you are looking for something cheaper, I know my partner went to Arcos as a university student and stayted at a bed and breakfast place very cheaply. I think there are quite a lot of those there, along with many other hotels. You shouldn't have a problem finding a place in any price range. Enjoy your trip - it is a beautiful town.