I looked at this a while back as my son was intent on having his too high so his hips were rocking.
Various sources but I will not say which is more correct than the next, however…
http://www.bikefitting.com/English/Theory/SaddleHeight.aspx
http://sheldonbrown.com/saddles.html
http://www.ebicycles.com/bicycle-tools/saddle-height
My take on it is you need it as high you can get it with out having to rock your hips. Hip rocking means that you are over extending. The lower you have it the less efficient the stroke will be as you will not be using all the available muscle.
I have had knee problems, mine seem to have gone since I did some exercises to strengthen some of the “weaker” muscles around the joint as advised by a physio a few years ago.