I have never been in Madeira but one of my friends went there just 2 weeks ago and he stayed in a 4 stars well located hotel. The hotel is by the downtown of Porto S. Maria so you don't have to use any car to get to the downtown and, I believe, it will be not difficult get public transport. My friend said it was a good hotel and woth recommending.

Sorry, I forget to ask him about how many stars there are but you can try to have a look of the web site or contact the hotel. Web site: http://www.portostamaria.com

Hope it could help you, Marco in Milan - Italy.