I am in the sewers below Baldur's Gate. I have been trying to find a way into the palace from there (in a certain letter it hints that there is a hidden passage into the palace) for a few hours. Can someone possibly give me a location on where I can find it, or maybe a hint?

Not all hints given in the game have a basis in fact. There is no direct connection between the sewers (or the Undercellar) and the palace at all--in fact, there's only ONE above-ground building that does have sewer access.