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Portuguese/Madeiran food can be a bit 'samey' over time and you'll find most the restaurants are 'same old same old'...
These are all in the centre of Funchal, not Ajuda, which is where the big hotels are.
The first thing is that once you get away from the city centre (ie up...) things get less expensive and, in many cases, better, quite quickly. Don't be afraid to start uphill and see where you end up...you'll find the restaurants the Madeirans use.
Some recommendations are:
Rua da Carreira area:
Restaurant 560 - Behind the Dolce Vita shopping centre (not easy to find) - fabulous food, individual decor and not expensive (Italian).
O Arco - very good for meat dishes, especially. Very popular with locals. Very friendly staff.
O Trigal - a real gem. The best bolo do caco in Funchal and very reasonable; excellent food and always quite busy. Nice people.
The next two are on the way up towards the Museo Fransisco de Freitas which is in all the guide books:
Sao Pedro (at the bottom of the Calcada Santa Clara) - The Coq au vin is particularly good. Busy lunchtimes but not at night. Reasonable. A great place to watch football and eat at the same time.
Mona Pizza - Unpretentious pizzaria with good food just down the hill from the Sao Pedro. Because it is a covered exterior, you can smoke at your table at the back of the restaurant. Reasonable.
Restaurante Sabores - tables in the square between Rua Bom Jesus and Rua Di Frigorifico, on weekdays very busy inside and out with local people and few if any tourists. A simple menu at low prices, massive wine list (ie choose between house white and house red!) and everything cooked to order.
In the Old Town:
O Almirante is good (on the corner just down from the Mercado os Lavadores) , if pricey - does excellent duck.
Le Jardin is also very good if a bit dear. Known for flambeed dishes. Fab stroganoff. Fills up fast, so if in a busy period, best to book. Not cheap.
Sea Front (Rua do Mar):
O Tricolor (Italian): Lovely people - probably the friendliest in a very friendly island. Very good bife na pedra and meat generally. The creme Catalan for pudding is to die for as is the apple pie. Start with the bruschetta.
Basically, the restaurants on the front and most of those in the tourist area are disappointing. Some of the ones by the marina are quite good, but variable quality. All the ones on the front (Beatle boat etc) appear to be served by the same kitchen.