No, don't worry. "Flattering" is not a bad word. The problem is you used it a bit incorrectly. What you probably should have said is "I'm flattered" which mean that you feel good about what he said about you. By saying "thank you for your flattering" you're saying that you think he is flattering you, which implies he's saying nice things to you insincerely. To flatter someone means to compliment them for ulterior motives, but to be flattered means you feel good about the compliment someone gave you. Does that help?

The word you should have used is 'flattery'. I suppose it is slightly negative in that it implies that the person speaking does not really mean what he/she is saying and that praise you are receiving is false. On the other hand most of us (myself included) like to be flattered, so please feel free to say any nice things you want to about me! On a serious note, you could have said "Thank you for your kind words" (bit formal) or maybe "Thanks for the praise", or just "Thanks"

flattering is the bad action because insincere