We recently stayed at the Zanzibar Palace Hotel in Stone Town for 3 nights and can not recommend it highly enough.
They greeted us as we arrived and took the time to sit down and advise us where to visit and the restaurants to eat at. The recommendation of Beyt Al Chai (??) was fabulous,in fact we ate there twice as the prawns where so delicious!
The rooms at the hotel are lovely, exceeding the web site photo's, the bath tub in our room (The Sultana) was huge and came with not only bubble bath but even scented massage oils for a totally luxurious stay. They even thought to have 2 hot water systems so there was more than enough hot water to fill the big bath!
The balcony overlooked the street where you could sit in the mornings with your coffee and cookies (brought to your room whenever you asked) and watch the town waking up.amazing passionfruit and avocado juice,yum!
Breakfast was delicious, especially the recommended a beach not far from the hotel which was beautiful, it turned out it belonged to another hotel and was a private beach which you could use if you had lunch (a great seafood bbq!) there are sunloungers on the white sands and the water is as warm as a bath. They had supplied us with beach towels too!
All in all, if you are in Stone Town (and you really should visit if you have the chance!) then do stay here, you will be more than pleased that you did!