I think a crafts-theme birthday party sounds really fun! I just facilitated a group of 10-11 year olds for a few weeks in a pre-college program, & they attended a class each day for 2 hours.
2.5 - 3 hours would be a good length of time for what you are envisioning. Everyone gets there & has 15-20 minutes of greetings, games, etc. before they settle down to see the craft.
Depending on the ages of the kids, either have 1 more complex craft, or a few smaller, simpler crafts. Or even, multiple craft stations to move around.
Crafting takes place for an hour or so, a bit longer if they are really into it. Then, group photos with all their crafts on display! (email them off your camera phone, or if you have a printer, download them & print them out before they leave).
Another 15 - 20 minutes of silliness, then serve the cake/ice cream & open presents.
Have fun! T.