I stayed in a new hotel in Horseheads. It was about a 10 minute drive to Watkins Glen. There are very few places to stay in Watkins Glen. There is a nice hotel right on the bottom of the lake, but it was booked when I tried to get a room.
Place on the end of the lake is super expensive. There are some small "motels" in Montour Falls, town next to WG. Corning is not too far away. Horseheads, Bath, Ithaca, if ya like eccentric people.....you could also look for a B&B on the lake.
I'm not sure where to stay (we stayed at the campground) but make sure and stop at the watkins glen chamber of commerce and get a brochure on all the falls in the area. there are quite a few. save at least a day for ithica. The falls there are very nice as well