Jacob,
hey, you found an interesting way of generating this Voronoi diagram, even though it is not so efficient.
The less important issue first: the varying thickness boundaries that you get, those butterfly shapes, are in fact the area between the two branches of an hyperbola. Precisely the hyperbola given by the equation |da - db| = 4. To get a thick line instead, you have to modify this criterion and replace it by the distance to the bisector of the two nearest neighbors, let A and B; using vector calculus, | PA.AB/||AB|| - ||AB||/2 | < 4.
The more important issue: there are two well known efficient solutions to the construction of the Voronoi diagram of a set of points: Fortune's sweep algorithm (as mentioned by templatetypedef) and Preparata & Shamos' Divide & Conquer solutions. Both run in optimal time O(N.Lg(N)) for N points, but aren't so easy to implement.
These algorithm will construct the Voronoi diagram as a set of line segments and half-lines. Check http://en.wikipedia.org/wiki/Voronoi_diagram.
This paper "Primitives for the manipulation of general subdivisions and the computation of Voronoi" describes both algorithms using a somewhat high-level framework, caring about all implementation details; the article is difficult but the algorithms are implementable.
You may also have a look at "A straightforward iterative algorithm for the planar Voronoi diagram", which I never tried.
A totally different approach is to directly build the distance map from the given points for example by means of Dijkstra's algorithm: starting from the given points, you grow the boundary of the area within a given distance from every point and you stop growing when two boundaries meet. [More explanations required.] See http://1.bp.blogspot.com/-O6rXggLa9fE/TnAwz4f9hXI/AAAAAAAAAPk/0vrqEKRPVIw/s1600/distmap-20-seed4-fin.jpg
Another good starting point (for efficiently computing the distance map) can be "A general algorithm for computing distance transforms in linear time".