I don't recall ever seeing a recommended limit - I think it's more a matter of how bad it degrades performance on any particular machine. FWIW, mine is approaching 1000 entries (1.2GHz/100MHz/512KB box) and I do not notice any performance degradation during day-to-day browsing.
Do you already have a large HOSTS file, or are you asking because you are thinking of using one?
I'm using it primarily to block banner ads. You can use HOSTS to resolve the usual spammer banner sites names to LOCALHOST (127.0.0.1). I also use it to build 'nicknames' for frequented sites that I get tired of typing in over and over, especially if the path names get long.
Also works great for things like web site developement for intranets where you can do pretty much the same thing, i.e., provide a short nickname that resolves to a particular network address/directory. Works great where machine-specific versions are desired and you don't have the time/desire to do anything too elaborate on the server.
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