Chrisjs:
I have wrestled with the same problem. In some places, I have to repair a hole in the varnish, and don't want to take a large area down to bare wood to get a uniform finish.
I have filled holes with several coats, up to 15, to bring the level up to the top of the surrounding varnish. In other areas I have sanded down the edges of the hole to feather in the area and haven't filled to the level of the surrounding varnish. In still other ares I have taken the whole area to bare wood. In subsequent years, I like the look of the places I have filled the holes the best, where I have taken it down to bare wood, next best, and the uneven level a poor third place. I should add that where I have taken it down to bare wood is a distant second place, as it still needs those extra 15 or more coats that the original had, before it will look as good.
And need I say, I haven't used anything but Epifanes for about the last 10 years, so the finish is superb.
Back to the original question, I prefer using a quarter sheet orbital sander, with 400 grit, as it allows me to achieve a perfectly flat finish, that I have never been able to achieve with hand sanding.