You've stated it perfectly. Either you're totally misjudging the amount of work involved (in which case, you're probably not what they're looking for), or they are asking far too much for a coding interview.

The longest off-site coding test I've ever been involved with took 1.5 hours, split into two parts of 45 minutes. If they can't gauge your chops in an hour and a half of technical questions and real-time problem solving, they're not doing it right.