This bed-and-breakfast run by a German-Chilean couple is a good option. It's not in the center of the city, but it's plenty close to shopping and restaurants and an eight-minute taxi ride to downtown. Best of all is the amazing breakfast, with homemade bread and jam, natural juices, waffles, pancakes, cake, yogurt, and on and on. They also can arrange outdoor excursions in the area.
Tirzaono 110, Temuco, Chile