I have been waiting a while to post on this spell because I also find a candle completely negating a second level spell and foiling an important spell-like ability for many creatures to be fundamentally broken. I also understand that for a second level spell it is quite powerful in 3.0 compared to the other 2nd level spells. I never used the 3.5 version because I thought the creation of light was silly.
Here is what I have been using in my games and has worked well for us:
This spell causes an object to radiate darkness out to a 20-foot radius. Creatures without darkvision are effectively blinded in this area. Creatures with darkvision have their vision concealed as though a dark fog has consumed the area of effect. Normal lights (torches, candles, lanterns, and so forth) and light spells brought inside the area of darkness can brighten the area, allowing a creature to see one level of illumination lower than the light source allows. If darkness is cast on a small object that is then placed inside or under a lightproof covering, the spell's effect is blocked until the covering is removed. Darkness can be used to counter or dispel any light spell of equal or lower spell level.
To me, this seems to be a bit of a balance between the traditional use of the spell and by reducing some of the encounter ending effects for such a low level spell. It doesn't completely punish those with darkvision, but it does hamper their visibility as it should. It also allows for raising the light level within the area somewhat for creatures that do not have darkvision at the cost of a spell or some resource to create light.