It really doesn't matter - both recessed cleats (on mountain bike shoes) or non-recessed cleats (on road shoes) can be set up so that your knees will be happy. Whether your cleats are recessed or not is dependent on your choice of pedals. And there are pedals that lock your foot into place, and pedals that allow your foot to float.
I use Speedplay Frog pedals which use a recessed cleat and are totally free float. This is what my knees are happiest with. Other people's knees don't like free float pedals. (And yes, I'm a roadie who uses mountain bike pedals!)
I'd recommend getting a pedal/cleat fitting at your LBS to make sure that your cleats are placed in a good position for your knees. (At least when you initially get the pedal system...)
--- Denise