There are several B&B's that have come recommended on this forum for Killarney.

Fairview Guesthouse (TA#41 very mixed reviews of late) in town came highly recommended some time ago and though it is been getting little mention of late I am not aware of any negative forum comments. http://www.fairviewkillarney.com/ They seem to have cut rates recently so perhaps it will fall into your budget!

Countess House (TA#37 but only one review) is very close to town and is family run. http://www.countesshouse.com/

Killarney Lodge (TA#2) is slightly closer to town but is not family run and a point about such was mentioned in one persons review. (And there seems to be a regular who stays there from the UK who frequently gets on to promote it every time I mention it so lets see if they do this time too?) http://www.killarneylodge.net/

Elyod House (TA#4) on Ross Road is also relatively close to town and been spoken of highly in the past. http://www.elyodhouse.ie/

Ross Caslte Lodge (TA#3) is a little further out of town (a little too far for to say it is a short walk into town) but has also gotten good mention in the forum. http://killarneyb-and-b.com/RossPage1.htm

TA#1 Friar's Glen is very much out of town and will not meet your needs but is deservedly #1

If you are not specifically set on staying at a B&B, look into the Killarney Avenue Hotel. It truly is within walking distance to town. When driving around the town looking at B&B's we had thought of, we found many of them to be farther than we really wanted to walk.