I am going to Chicago in May 2004. Am looking for a hotel within walking distance of the Sheraton Towers (on E. N. Water Street). I would prefer a smaller "boutique" style. I am willing to entertain any price range.
I have looked at the Kimpton hotels but they seem too far away as do the "W" hotels. Should I just give up and book a room at the Sheraton? (My conference is in that hotel)
hotels.

As you can se from this map
http://www.choosechicago.com/HOTELS_MICHIGANAVE.HTM
there aren't a lot of hotels within a four block area of the Sheraton. That's because it is in an area of former warehouses that were torn down for a massive redevelopment. You might take a look at the Swisshotel, not a boutique certainly, but more intimate than the Sheraton. It is just south of the Chicago River - on the map listed above, you'll have to go to "main accommodation page" and look at the "Loop" section.

Unfortunately there seems to be nothing really close to the Sheraton Towers.

I really liked the Hotel Monaco which is right off Wacker and a block over from Michigan Ave.

There's nothing close to the Sheraton worth mentioning. The Embassy Suites one block away is not what you're looking for based on your description.
I must plug the Peninsula. I attend a meeting each fall at the Sheraton and the last 2 years have stayed at the Peninsula. While it's not a boutique hotel, it is Chicago's best hotel. If you can get a corner executive suite room looking up and down Michigan Avenue I can't imagine you'll miss not being in a small hotel. Service there is outstanding, location is great, rooms top notch. And oddly enough, it's never as pricey as the Ritz/Four Seasons/Hyatt (each of which I've stayed at) even though it's a better hotel IMO.

I am not sure what you mean by far. the W Lakeshore or the Hotel Monaco is no more than a 15 minute walk to the Sheraton, and most likely less. the Westin River north is worth mentioning as it is a smaller property.

The Hotel Monaco is about 1/2 mile away so it's about a 10 minute walk from the Sheraton. It is one of the hotel considered "boutique" in Chicago. The Hotel Burnham is about 3/4 of a mile. Hotel Allegro is probably the furthest.