Hi, it's Me!
As the player in question, let me give you my agruement as to how this works:
First off, yes it is a judgement call that the vase returns to normal size when shot from a x-bow. This is basically a statement that "shot from a x-bow" is functionally equal to "tossed on a solid serface." Assuming the target is a solid surface of course. So that is a DM's call, plain a simple. If you decide that the answer is no, then no problem. I can still throw the bead, just not as far. All I get out of the x-bow is range, and a certain amount of coolness factor.
Secondly, the question of will the container break: The answer to this is yes. According to the rules in the DMG (or maybe the PHB) on grenade-like weapons, the container is always assumed to break. This is one of those 3E rules that was included for simplicity's sake.
Finally, where did I get the 4d6 worth of damage? You didn't ask this but I will answer it anyway. I got it off of these boards. I posed this question about a year ago, and one poster quoted the sage (in a non-official personal e-mail), who said that for each doubling of volume of the missile, you get a larger damage die as per the rules for larger weapons. I liked this ruling for several reasons, not the least of which is that even as a munchkin power gamer 16d6 of fire damage for two rounds seems a bit nuclear to me. So here is the progression for Alchemist fire:
1 Flask = 1d6/1 point splash
2 Flasks = 1d8/1d2 splash
4 Flasks = 2d6/1d3 splash
8 Flasks = 1 gallon = 2d8/1d4 splash
2 Gallons = 4d6/1d6 splash
4 Gallons = 4d8/1d8 splash
And so on. this means that there is a financial limit to how nuclear this gets, because the cost of one weapon starts to equal or exceed the cost of a charge on a wand of fireball (which is a much better weapon of course), or even a neclace of fireball.
Note that the damage is still only to one target, and the splash is still only a 5' radius. The alchemist fire still burns for only two rounds, and the DC save for catching fire is still only 15. None of these factors has changed for this weapon at all.
Now as far as putting the thing on the end of a x-bow bolt goes, whatever you decide is fine. But as far a using this spell to make the alchemist fire bead in the first place, it is a legal (and if I may say so) creative use of a common spell in the PHB. This kind of stuff is why I like playing wizards. I like having tricks up my sleave so to speak. So please expect me to give you one or two similar suprises in the future.
Some other things that I commonly keep in shrunk form on my person:
Barricades (big wooden pallets basically)
Bonfires (for use as incendiaries)
Pools of water (for emergency fire extingushing and other usefull things like that)
Bags of shrunk boulders (wait till you see what these are for-tee hee!)
Ladders
I also have a 1 gallon bolt of holy water (that was spendy I can tell you!) and a 2 gallon bolt of acid.
Needless to say most of the heavy ordinance is kept in my bag of holding and away from dispel magic effects.
I considered designing a ballista that mounted on a Tenser's Floating Disk, for mobile artillary, and keeping that shrunk in my pocket, but ballista do such sucky damage in 3E, I decided it wasn't worth the trouble!
Yep, that shrink item is a great spell.