I would be inclined to kill it.....it looks awful! ;-) Are you in an area of the country where a fireplace is put to much use? If not, I would be inclined to place a lot of pillar candles of different heights and smaller votives in the fireplace. I use to do this in my fireplace, (before we installed a gas insert) even though it was functional - it looked wonderful and didn't suck all the heat out of our home like a real fire would. You might also investigate gas inserts - there might be something available that doesn't require a traditional chimney.

I've been doing alot of research on this lately. The sand idea is a good idea. The most modern stainless liners use a dense 1/2" wrap around them, made of mineral wool. This satisfies UL standards, even without sand or mortar. I talked with our lab engineer this morning and he doesn't see any problem with keeping the existing clay flue and using the equivelent of a 6" flue in the chimney, even though the flue outlet on the boiler is 7". The reasons being that a 6" flue can handle up to 180K BTUH in heat and my boiler is only 60K BTUH max and it's an interior chimney in good condition. My real concern from the beginning was downsizing from a 7" flue outlet to a 6" stainless, insulated chimney flue. Almost every wood stove today is using a 6" flue. We also have large boilers out in the field that have downsized from the recommended 6" flue (180K BTUH) to a 5" insulated flue with no problems at all. I determined yesterday that there is a 1/2" of air space all around my clay liner and it's not the type of chimney where you could cut out block and replace it. I'm not ordering any materials yet and I'll keep my ears open for opinions for a few weeks.

Thanks. I think the gap is a bit too wide for caulk, so I'm considering foil tape. It's 4' away from the water heater and might not be too hot at that point. Not sure if that's too half-baked of a solution.

Basically you need a piece of sheet metal as a spacer so the flue does not touch anything because it gets hot. Then you can make it airtight with firestop caulking. You can cut the sheet metal so you can get it around the flue, then just seal it up. http://www.amazon.com/Selkirk-106406-Vent-Firestop-Spacer/dp/B00S04FUW6/ref=sr_1_24?s=hi&ie=UTF8&qid=1439773118&sr=1-24&keywords=6%22+firestop http://www.homedepot.com/p/3M-10-1-fl-oz-Fire-Barrier-Sealant-Caulk-CP-25WB/100166701