I see no reason to think that Harry is imagining things. If there is a smell, there is a smell. Specially sulfur, you cannot really confuse it with anything (but rotten eggs, I guess). I don't know what it means, but I do think Harry's loss of control was truly fueled by the mantle. I mean, of course he was angry and seeing red by himself, but I think that without the mantle he wouldn't have actually attacked the Knights (except for a pushing or something like that). His anger at them was the mantle furious because they were denying it its prey.
Back to the smell, of course it hints infernal. Denarian, Lucifer agent, whatever, but I think the simplest explanation is that the evil in Harry became so bad that the angel of the sword considered it demoniac. And it produced the smell.
Rereading PT, I've noticed than when Butters touches Fidelacchius blade he feels "a little warm", while when Harry does the same he feels "unconmfortably warm but bearable". I guess that is because Harry is more in the darker path than Butters. When he is in full rage mode, the sword actually burned him hard. It is just interesting, like a detector of evilness.