Golfscript, 144 135 characters
Instead of continuing to try golfing my Python solutionPython solution, I translated it into Golfscript:
{}/49-:y;97-:x;:N;8,{.x-abs:A
8,{.y-abs:B@[\]$1=:C[B
A+3=\3<&2C>B
A*1<B
A=]81N={(;{|}*}{"NKRB"N?=}if
C*{[N
2$97+@49+]''+p}{;}if
A}/;;}/
Straightforward translation without much golfing so it can most likely be whittled away further. Takes input from stdin without a newline, try it here (1st two lines are to mimic stdin).