Does anyone know the reason for the Valar imposing the restrictions they did on the Wizards?
We know the Valar were reluctant to openly war against Morgoth until being convinced to in the War of Wrath. They wanted to avoid the massive damage to M.E. which did occur. However, Sauron was less powerful than his master, and his destruction would could massive damage to the lands his power was imbued in.
Why would the Wizards be restricted from using their full power and fighting Sauron as peers? Together they should have been able to severely hinder him, if not defeat him. Even if using their true power and revealing their identities, they could still guide the free peoples of M.E. without dominating them. In fact, openly coming as emissaries of the Valar might have made the free peoples more likely to listen to them and stand against Sauron.