At my current job (where i've interviewed candidates) we give out a take home assignment, but we explicitly enforce a 2 hour time limit to do it. We felt this was reasonable because combined with an onsite interview and a phone screen, the total amount of time a candidate would spend interviewing for a position is about 8 hours (a typical workday). I'm not against take home assignments per se - but 3 day assignments seems crazy. I can't imagine myself doing that as long as there are other decent jobs out there that don't require it.
I think this is the best approach. You get the opportunity to do exactly what the job expects, without the pressure of having to manage communication with someone breathing down your neck. A savvy employer can extrapolate what you're able to produce over 2 hours to whatever project they'd have you work on.
We've had pretty good luck with it thus far. Generally, it is a good way to chop off the long tail of "not good enough" and bring the better ones onsite.
As you said, we calibrated our general expectation to what we think is reasonable in 2 hours - so we expect "good enough" code, but not perfect code.
