This is exactly the way Invisibility works, except without the option to remain hidden. If you rule that you can't make a sneak attack while hidden, then you must also rule that you can't make a sneak attack while under the influence of the Invisibility spell, since both require you to be unseen, and both cause you to become seen when you attack.
Your forgetting something though, with invisibility you can walk around the entire battlefield without anyone being able to see you. Yes, there is a chance to notice you, but no one can see you. With the hide skill, you cannot do this. Let me point out something in the Hide skill:
Quoted from the SRD under the Hide skill
You can move up to one-half your normal speed and hide at no penalty.
You need cover or concealment in order to attempt a Hide check.
If people are observing you, even casually, you can’t hide.
Special: If you are invisible, you gain a +40 bonus on Hide checks if you are immobile, or a +20 bonus on Hide checks if you’re moving.
A 13th-level ranger can attempt a Hide check in any sort of natural terrain, even if it doesn’t grant cover or concealment. A 17thlevel ranger can do this even while being observed.
While invisible, you can move your full movement and stay invisible. You do not need cover or concealment to stay invisible. Even if someone is observing the square you are in, you are still invisible. Granted they could notice you, but you’re still invisible.
An invisible rogue could do a double move and completely circle an opponent several times while being invisible for several rounds, even talking to his opponent during this time. Then, later on, do only a move action and attack while invisible and still get the SA, even if the rogue was saying “hey fella, I’m about to sneak attack you”. Doesn’t matter, he would still get the SA. Yes, after the attack the invisibility is gone. With the Hide skill you cannot walk around the opponent, taunting him or talking to him, and be able to sneak attack, since the opponent would see you. I don’t care if the rogue rolled a nat 20 with high modifiers to his hide check, if the rogue stated he was going to walk around the opponent while hiding and talk to the opponent, I wouldn’t even allow the hide check.
Also note the line under hide that states: “If you are invisible, you gain a +40 bonus on Hide checks if you are immobile, or a +20 bonus on Hide checks if you’re moving.”