I don't like time limits either, from both sides in just the way you said. They also strike me sort of like putting ads up - something marketing guys always say (very paraphrased, and I've heard it from many): "if your return is greater than the number of people who complain, it's a win". I don't believe that - I want to make as many people happy as possible, whether or not they're gonna buy. A positive impression is valuable to have loose in the world, and regardless, I would feel like a heel doing something I knew would upset people.
It's like nag screens that make the player wait before they can click - that's simply disrespectful to the customer. They know whether they want to buy or not. Can you imagine an ad on TV that wouldn't let you change the channel until it was over, or even turn it off (just as a locked nag screen keeps you from going back to using your computer for other things, which by exiting the game was clearly your intent)? You know, just to be SURE you understood the benefits? It insults me to sit through those nags, it's like the game is saying I'm not smart enough to make my own purchasing decision, and it makes me not want the game (moreso the longer it sticks me).
Which is why I don't like your evil tetris blocks either. I think that would just be annoying, and give the player a false image of what the game is like. Even if they knew those blocks would be absent in the full version, they still are playing something that doesn't play the same as the full version. Heck, they might even like the added challenge of the $ blocks. I know I often lament the endless nature of games like Tetris, and wish they'd do something to end more quickly, other than getting unplayably fast, which isn't fun. But most likely they won't like it, and they won't like playing your demo, since it has them. Which doesn't mean they'll buy your game, it means they'll uninstall the demo. You need the players to have fun while playing the demo! Purchasing games is pure emotion, and if they don't have fun playing the demo, they'd be pretty masochistic to shell out money for the full game.
I don't really know a good answer for replayable, small content, games. Replayable big content can still get away with withholding levels - Tony Hawk demos were often released with 1 level, and people wanted to buy more. A game like tetris, I think... I would just come up with more to draw them and leave it out of the demo. Multiple modes, silly alternative block graphics... definitely if it was like tetris, I'd include a Puzzle Mode with fixed levels to solve, and only include a subset. That's always a good teaser. Actually, for the pure tetris form, I think just cutting off demo games at level 5 or whatever, and saying "hey, if you had the full version, you'd still be racking up points!" would be appropriate.
I know it's just my personal view, but the one method (time limit) seems unfriendly to me, while the other (play limit) seems like it's giving me a taste of the game so I can decide if I want more. Time limit actually does the same thing, but for me as a consumer, it puts too much pressure on me to decide. It's like a high pressure car salesman who tells you this deal will be gone if you don't snatch it up, versus one who gives you a test drive and tells you to go him and think about it, sending some nice literature with you.
Myself, I'm leaning more and more to the "give them a good big fun free game, and tell them that for some money, they can get even more!" angle. The 'episode' concept really. Or maybe even like those free MMO games where you can pay money to get wings on your character or something. Really hook people in, and the ones who pay you are the ones who just can't help it. Talk about quality customers!