Are you having a knee operation or not? Your first post said so, but your next post, it doesn't sound like you've got a doctor or physio's advice on weight training - which you should do before doing anything.
Go to the quack, get some advice - maybe you're scared they'll tell you that you can't do anything, but usually they tell you ways to work around whatever your injury is. And there may be treatments, surgical or otherwise, that'll make your life much easier.
25% bodyfat is no threat to your health, it's well within the healthy range for a woman. What you feel comfortable and attractive with - well, it seems you prefer less. That's okay, you have to decide that for yourself. Don't focus on exact percentages, as you say these things are not very accurate, more important is your health and how you feel about yourself.
Incline walking will grow muscle, but not much in bulk. Muscle is of two kinds - fast twitch, and slow twitch. Fast gives those quick explosive movements, like in weightlifting and sprinting, and fast twitch fibres have some size. Slow gives slower movements, like in jogging, and slow twitch fibres are quite skinny. This is why sprinters have enormous legs, and marathon runners don't.
Walking will grow the slow twitch ones mostly. This is good for you, but will take a long time to give you the "toned" look. As I said, "toned" usually means that the muscles are a bit bigger (more fast twitch!), the fat is a bit less, and the muscles are a bit tighter and ready-for-action instead of being slack little rubber bands.
For that, you need heavy weight training. See your quack.