As far as references, I do not think you can do much better than THE
INDIVIDUAL IN SOCIETY by A. L. Macfie. (Of course, there is always TMS
itself, where Smith makes very clear in the opening passages that
sympathy is often used to indicate pity or compassion, but that he uses
it to mean 'fellow-feeling' of any kind:

"Pity and compassion are words appropriated to signify our
fellow-feeling with the sorrow of others. Sympathy, though its meaning
was, perhaps, originally the same, may now, however, without much
impropriety, be made use of to denote our fellow-feeling with any
passion whatever." (I.I.5)

I might also recommend Heilbroner's essay in History of Political
Economy (1982), "The Socialization of the Individual in Adam Smith", or
his annotations in The Essential Adam Smith.

Sympathy therefore means empathy.  When joined with the reason of the
impartial spectator, the result is 'sympathetic reason' or 'rational
sympathy', and when highly developed, as in the higher level of
prudence, "It is the best head joined to the best heart." (VI.I.16)

I have not been able to follow the whole Adam Smith discussion in its
entirety, so apologies if this has been said already, but it is worth
noting that activities that we would identify as 'economic' or in
pursuit of one's self-interest are not part of the higher level of
prudence, but the lower level, and are only worthy of a "certain cold
esteem":

"Prudence, in short, when directed merely to the care of the health, of
the fortune, and of the rank and reputation of the individual, though it
is regarded as a most respectable and even, in some degree, as an
amiable and agreeable quality, yet it never is considered as one, either
of the most endearing, or of the most ennobling of the virtues. It
commands a certain cold esteem, but seems not entitled to any very
ardent love or admiration." (VI.I.15)

The higher level of prudence, on the other hand, is associated with:

"Wise and judicious conduct, when directed to greater and nobler
purposes than the care of the health, the fortune, the rank and
reputation of the individual, is frequently and very properly called
prudence. We talk of the prudence of the great general, of the great
statesman, of the great legislator. Prudence is, in all these cases,
combined with many greater and more splendid virtues, with valour, with
extensive and strong benevolence, with a sacred regard to the rules of
justice, and all these supported by a proper degree of self-command.
This superior prudence, when carried to the highest degree of
perfection, necessarily supposes the art, the talent, and the habit or
disposition of acting with the most perfect propriety in every possible
circumstance and situation. It necessarily supposes the utmost
perfection of all the intellectual and of all the moral virtues."
(VI.I.16)

This is significant, because the pursuit of economic gain results from
the drive of "bettering our condition," itself rooted in the desire to
be the object of other's sympathy ("From whence, then, arises that
emulation which runs through all the different ranks of men, and what
are the advantages which we propose by that great purpose of human life
which we call bettering our condition? To be observed, to be attended
to, to be taken notice of with sympathy, complacency, and approbation,
are all the advantages which we can propose to derive from it.").

The poor man's son ("whom heaven in its anger has visited with
ambition"), then, after a life of toil and trouble to acquire and
accumulate, driven to better his condition in order to be the object of
sympathy, in the end realizes that it really didn't deliver:

"In his heart he curses ambition, and vainly regrets the ease and the
indolence of youth, pleasures which are fled for ever, and which he has
foolishly sacrificed for what, when he has got it, can afford him no
real satisfaction." 

But back to the earlier point, even if the poor man's son, driven by the
desire to be the object of sympathy, achieves the wealth and rank, he is
awarded only with a certain cold esteem, since this is only the lower
level of prudence.

Of course, Smith argues that it is good that this deception (admiring
the rich and powerful and believing that if one achieves this they will
live easier or be happier) exists, as it serves the invisible hand-like
purpose of creating jobs and wealth and goods, etc.

As many times as I read it, it never fails to leave me amazed.

Mathew Forstater