1: Is there a way to log in to an AWS instance without using key pairs? I want to set up a couple of sites/users on a single instance. However, I don't want to give out key pairs for clients to log in.
2: What's the easiest way to set up hosting sites/users in 1 AWS instance with different domains pointing to separate directories?
1) You should be able to change the ssh configuration (on Ubuntu this is typically in /etc/ssh or /etc/sshd) and re-enable password logins.
2) There's nothing really AWS specific about this - Apache can handle VHOSTS (virtual hosts) out-of-the-box - allowing you to specify that a certain domain is served from a certain directory. I'd Google that for more info on the specifics.