Hello and welcome to the forum. I can't help with the knee, although I'm sure more stretching and running on a more forgiving surface will help a great deal.
As for the watch, though, I have this one:
http://www.runnersneed.co.uk/shopping/item.aspx?id=3977 There's a men's version for the same price, too.
At £50, it's a bit more then the £30-40 you're looking to spend, but if you shopped around, I'm sure you'd find it cheaper somewhere else.
It lets you time up to 50 laps (hence the name), but the functionality I bought it for was exactly what you are looking for - the ability to set up intervals. The one restriction is that it only lets you alternate 2 intervals (eg 3 mins run, 1 min walk, 3 mins run, 1 min walk, ...). If you wanted to do something a bit more complex (eg 5 mins run, 1 min walk, 3 mins run, 1 min walk, x mins run, x mins walk, ....) you wouldn't be able to do that.
I've found it really easy to use and I can hear the beeps clearly without them being so loud as to disturb the peace of a Sunday morning.