You might consider staying in the Old George Hotel in Rathfriland. It's about 10 miles away in a funny old hilltop village, but it's very inexpensive, the breakfast is unbelievably generous and good, the propietors are very welcoming and make sure you get a room overlooking the Mourne Mountains - the view from the hotel is stunning. It's well used by the locals and you'll meet some entertaining folk.
Old George Hotel
Caddells Lane
Rathfriland, Newry, BT34
028 40630623
028 40630836