Co-sleeping is definitely not for everyone.. but I've done it with all four kids during the early part of breast feeding. I also keep a bassinet by my bed. I have slept with my kids on my bare chest, with me on my back. I've slept with them in the crook of my arm. Contrary to what others say I actually sleep much better with the baby near me then when I use the bassinet. When he is in the bassinet I find I am listening for every little noise, every peep. I don't sleep well. When he's next to me, it feels so natural. I relax and sleep but I don't move. I hold my baby and sleep. This is definitely not for everyone. My husband can't do it - for instance. He doesn't wake up when the baby cries, he doesn't have that baby sense that I seem to have. My husband (lucky dog) sleeps like the dead.
Anyway, don't let someone pressure you to co-sleep, or NOT to co-sleep. Do what feels right to you. Just for your info - that night feeding stuff can be pretty normal. My three week old does the "frenzy" cluster feeding too. It helps build up your supply, and it won't go on forever. But I *am* co-sleeping and he still does it.
Something you might look for -- There is a bassinet called the "arms reach co sleeper" which is a nice compromise. It comes up to level with your bed, but gives the baby it's own space. So the baby is right along side you and easy to reach for nursing. You might look on Craigslist in your area and see if you can find a nice used one. :) If not, I know Babies R Us in our area carries them.
Good luck - whatever you decide. I sympathize! I am up nursing right now. LOL. :)