Hey NYCSilverBullet, this topic has been discussed a bit on here, but I'll toss my two cents into the ring because this topic is close to home for me.
I'm not quite as short as you at 5'6 and a half, but I face many of the same challenges.
First of all, you mentioned that you've seen attractive girls with short guys, and even with guys that are shorter than them. This is good, because a lot of short guys on here refuse to accept that this is even possible. It is very possible. I consider myself a short guy and I have dated some very attractive women, including one who was 5'8". I prefer women that are my height or shorter, but that's neither here nor there.
Your post has really two separate questions:
1) How can I stop my limiting beliefs about myself from tangibly affecting my approaches
and
2) How do I save face/come back with a quick reply when faced with the "too short" rejection
I'm going to tackle these backwards, because question #2 is the easiest to answer. If you've already been rejected by a woman, and it's a REAL rejection, not a sh!t test or her just busting your balls, my advice is just to EJECT. If you try to come up with some retort or get testy, you're going to just play into her perception of the "Napoleon complex" and dig yourself a deeper and deeper hole.
Side note about the "Napoleon complex" - this is a non-existent and even historically inaccurate concept. First of all, the legend about Napoleon's height originated because of the confusion regarding converting between French and English feet/inches. Napoleon was about my height, 5'6"... the AVERAGE height for a 19th century French male. Look it up. 5'6" is not tall by any means, but hardly the sub-5 foot tall caricature he is often portrayed as.
Additionally, tall people or people around average height love to throw around the idea that we have this "complex", but really what they've done is created an inescapable quandary - we are automatically labeled as "try hard" or "compensating" for many things we do, simply because of our height. Whereas average men doing the same things wouldn't hear anything about it. It's often pointed out that Napoleon and Hitler were short, but nobody talks about any of the other dictatorial pieces of sh!t who were tall as hell. But I digress.
The real meat of your question has to do with the negative feedback you are giving yourself in the field. This has to stop now. I'm as guilty as anyone of mentally beating myself up after the fact, which I need to get better at, but I certainly would never allow these limiting thoughts to enter my mind while in the field.
You need to work on consciously re-writing the mental "dialogue" that you have with yourself on a day to day basis. You are faced with something you cannot change - you are 5'3". This fact is GOING to make dating more challenging for you than for other guys. HOWEVER, you already know it is not challenging to the point of being impossible. So with this in mind, resign yourself to the fact that occasionally a dumb b!tch will insult your height when you try to pick her up. Occasionally you will meet a girl that really is into your facial features and/or personality, but can't deal with dating a shorter guy. Who cares? It's not your job to make everyone like you.
Read that again: it's not your job to make everyone like you.
I can tell from your post that you are a reasonably smart, successful guy. You already know you have a lot of worth. Do not waste any more of your valuable time allowing yourself and your potential to be LIMITED by your incorrect, negative beliefs about your height.
Some guys have huge ears, or acne, or are 6'10", or have a handicap, or whatever. Everyone has their own personal shortcomings (no pun intended), but you simply cannot accept that excuse. Life is yours for the taking.
Start by telling yourself that you no longer care about even the worst-case-scenario of asking a taller woman out. Because you shouldn't, man. Rejection is always better than regret.
Search for squirrels' post on the "mirror test", you may find that helpful as well.
One last piece of practical advice - you may want to try a dating site that lets you filter your search by height. You will get mixed views on this but I have had great success with online dating. Not only are girls expecting to be "approached" because you're all there for the same reason, but you can be a little more selective in the type of girl you're looking for.
Good luck bud, you'll do fine in the end, I'm sure.