CathyM is right. Look for the places frequented by Spaniards, check out the menu (always posted outside) and, specifically, the menu del día (we found great selections at extremely reasonable prices), then enthusiastically proceed.
Our last afternoon meal in Madrid was a gem. Since we were heading for either the 5:30 pm bullfight or the Reina Sofia museum (free after 2:30 on Saturday), we knew we'd be walking through a particular area so we decided to look for a specific restaurant listed in the Rough Guide. Unfortunately (or fortunately, perhaps), it was closed so we continued down the street, saw a small restaurant/bar, perused the menu, looked inside at all the Spaniards and entered. Although we ordered from the menu del día (good sopa castellana and wonderful veal chop), I spied a nearby dessert (ponche segoviano) which I just HAD to try. The waiter informed us that there would be a small supplement as it was not one of the postre choices. Well worth it!
P.S. Sorry, folks, but the bullfight won out over the museum but an excellent choice as it turned out to be the Gran Corrida de Rejones--with the toreros on horseback. The horsemanship was fantastic. I enjoyed it so much more than what we think of as the "traditional" bullfight. As an animal lover, however...well, guess I should save this for another thread.