Actually, there's nothing wrong with sleep.
You can use a combination of QueryPerformanceCounter/QueryPerformanceFrequency to obtain very accurate timings and on average you can create a loop which ticks forward on average exactly when it's supposed to.
I have never seen a sleep to miss it's deadline by as much as 50 ms however, I've seen plenty of naive timers that drift. i.e. accumalte a small delay and conincedentally updates noticable irregular intervals. This is what causes uneven framerates.
If you play a very short beep on every n:th frame, this is very audiable.
Also, logic and rendering can be run independently of each other. The CPU might not appear to be that busy, but I bet you the GPU is hard at work.
Now, about not hogging the CPU. CPU usage is just a break down of CPU time spent by a process under a given sample (the thread schedulerer actually tracks this). If you have a target of 30 Hz for your game. You're limited to 33ms per frame, otherwise you'll be lagging behind (too slow CPU or too slow code), if you can't hit this target you won't be running at 30 Hz and if you hit it under 33ms then you can yield processor time, effectivly freeing up resources.
This might be an intresting read for you as well.
On a side note, instead of yielding time you could effecivly be doing prepwork for future computations. Some games when they are not under the heaviest of loads actually do things as sorting and memory defragmentation, a little bit here and there, adds up in the end.