Bicycle Mechanics - handle bar height

I have an older (pre'92) Diamondback ascent mountain bike (no shocks) I use for commuting.

The frame is perhaps a bit small for me, the seat is raised quite high, but not beyond marked limit.

The flat style handlebars are therefore 3" below seat. From what I've read this is low, but I have a few clarifying questions:

1. The recommended starting point is top of bars level with seat, but this assumes handlebars with drops, so if riding in drops, hands would be at about 4-6" below seat, right?
2. I am very comfortable with the 3" lower bars. No wrist pain, good visibility, etc. Is this OK?

Al

Right, and if your comfortable, don't worry about it.

3" of drop is pretty standard for a racy cross-country style MTB as used by city couriers.

I find that I have better control and just feel better when the grips part of the bar is about 1.5" below the seat. That's been the case for both the hardtail and my new full suspension bike. For my road bike, I prefer the flats to be about the height of the seat.

A lot depends on the distance between the grips and the seat. With the original 30 mm longer stem on the mountain bike, I had to have the grips the same height as the seat. I had to shorten the stem to facilitate getting behind the seat.

Al

right now Im riding with the stem fliped over, my bars are about 3" below the seat as well, I like it, I got a road bike last fall, and since riding that, it's got me more comfy with a more "race" position.
Some people need the "knee over spindle" seat height 83% of inseam, type of set up, some people mix it up, some have unconventional set ups, what ever works for you is whats best.

Try raising the stem by 1 cm. At the end of a week, note whether you felt "better" or "worse" in that position. If unsure, lower it again and compare at the end of the next week. To overgeneralize grossly, casual cyclists tend to set their bars too high, whereas "serious" cyclists tend to set theirs too low. The best height depends alot on your riding style, flexibility, and arm length, as well as the bike's top tube length. On my mountain bike, the top of the saddle is about level with the upraised ends of my handlebar extensions. On my road bikes, I tend to set the tops of the drops about 5cm below the saddle. To not be afraid to experiment -- the right setting for you is not necessarily the right setting for the next guy.