Krell HTS 7.1 vs Denon AVR-X4300H

First question, are you intending on replacing your current 2 channel system (McIntosh MA6600 and MCD550)?  Or do you just want to build a home theater and still keep your 2 channel system?  If you are intending on replacing the 2 channel system, you are not likely to get the type of sound or quality of sound with the budget you have.  I would recommend looking at the higher end McIntosh processors (for example, there's a couple of really good condition MX150s on audiogon for $3500).

To answer your question, the two options you have are really different.  The Krell is going to be very fast and high bandwidth.  This means you will have a lot of attack and clarity in the sound.  This is great for home theater and movies, but some people don't like it for music.  I love the Krell sound personally. Some people feel that the Krell is too forward and "in your face".  But in movies, I think it's important to be able to hear every single subtle sound.  That being said, the HTS 7.1 is going to be 15 years old.  If you can get a nice one where everything works, that's great.  You might want to have the power supply board re-capped as the caps have aged and dried out by now.  Also, I have seen both the digital input sections fail as well as some of the analog sections after all this time.  And, of course, you will need to use the COAX or toslink digital inputs.  You will be limited to compressed Dolby Digital and DTS audio.  Also, the HTS 7.1 will down-convert any hi-res audio to 48Khz (i.e. a 24/96 track will be down-converted to 24/48).

The Denon receiver is not going to be able to produce the quality of sound.  I think the Denon may be a warmer sound than the Krell (not as forward or in your face).  I wouldn't use the Denon in this situation (unless you already have it and just want to put together a home theater). 

The McIntosh sonic signature is very laid back and warm (many people love this for music).  Based on your budget of around $1000, I would recommend looking at a used Marantz AV7702 processor (they are going from $800-1200).  The Marantz sound is going to be on the warm side of neutral, but still very detailed.  This may be a good match for you, based on your music tastes and still be a nice processor for home theater.  Since the Marantz has HDMI, you will be able to take advantage of the uncompressed bluray sound formats (DTS-HD MA and Dolby TrueHD).  Also, you can play hi-res audio through the HDMI cable as well.

The HTS 7.1 was a $8000 processor, and I think it was an extremely good processor. I had it for a long time. It makes a good 2-channel analog preamp, though I would say that it’s slightly soft for a 2-channel preamp because of its analog input stage. It can sound very good when used as a digital DAC/processor, but it is getting very old at this point.

The McIntosh MX150 aren’t that old. They are only 2 generations old and MX150 does support HDMI and bluray formats. Though, it is not new enough to support 4K (it’s only HDMI 1.3). I suggested it because you liked your 2-channel McIntosh setup.

In reference to your Denon, it is a receiver, which means a good portion of the unit cost has to go into the amplifier section. It may sound okay, but you’ll get much better sound quality with a dedicated processor. I recommended the Marantz because it does have an excellent design for a processor at that level. Good power supply (2 x 10,000uf capacitors) and discrete balanced output stages. Sonic signature is a little on the warm side, so it will not be as fast on the attack as the Krell stuff (or other processors such as Anthem or Arcam). I wouldn’t go for a KRC3 since you already have such an excellent 2 channel system. I think the Marantz will do a good 2-channel representation as well as provide for a good theater experience. The KRC-3 is on the warm side and others have had better experience with something newer like the Parasound P7.

Trying to make an awesome sounding 2-channel plus home theater system is going to cost a whole lot of money.  The best you can you can do with that budget is something decent.  It's not going to compete with your McIntosh 2-channel system, but it should sound pretty good anyways.