This may be a little late to be useful for you, but I just stayed at the Sheraton Montevideo and found it to be excellent. Although the location is less central than the other big American chains in town (Radisson and Holiday Inn), it's not bad. The hotel is attached to a fairly big and nice mall, which could be good if you wanted to shop.

In the hotel itself, I found the service to be very accomodating. My room was average-sized, but fairly nice, with a view over the ocean. I'm currently in the Montevideo Radisson, and the Sheraton seemed to be somewhat nicer and better maintained than the Radisson, or at least the older wing that my room is in.

Without having an exhaustive look at the other options, it would seem that the Sheraton may be the best option in town, although I've read of some local (non-chain) hotels that sound very charming and are probably quite nice.