Sauté shallots and garlic in hot oil in a medium nonstick skillet over medium-high heat 1 minute. Add mushrooms and 1/4 tsp. salt; sauté 5 to 6 minutes or until tender. Add sherry; cook, stirring occasionally, 30 to 45 seconds or until liquid is reduced to about 2 Tbsp. Stir in broth and remaining 1/4 tsp. salt. Bring mixture to a boil, and boil about 10 minutes or until mixture is reduced to about 1 1/2 cups.
Whisk together flour and 2 Tbsp. water in a small bowl until smooth. Whisk flour mixture into mushroom mixture. Reduce heat to medium, and simmer, whisking occasionally, 2 minutes or until slightly thickened. Remove from heat; stir in butter, 1 Tbsp. at a time, until butter melts. Stir in thyme and pepper. Serve immediately, or cool completely, and refrigerate up to 2 days. Heat in a saucepan over low heat.