I prefer no limit. Realism can take a hike in this regard as far as I'm concerned. In Oblivion, I always end up with three or four different storage bases: usually the waterfront house, Frostcrag Spire, the Knights of the Nine safehouse, and the Shivering Isles palace. I always end up hoarding items that I would have otherwise sold, and it bugs me. I hate clutter, both in real life and virtual life.
If there must be a limit, then go with the item limit. Dragon Age did this well. You could have 10000 duplicates of an item, but it only counted as one. It was a unique item limit, I guess in that you weren't penalized for carrying redundant items (like if you had a ton of poultices).
That Tetris inventory sounds awful. I guess some people love hassle?