Hi,
a common practice is to let Undo undo all characters entered during last stroke (that is, not interrupted by movements or other operations (find/replace/search) at once. That is, If I type a few words, then press Option-Z, I expect all the words to disappear, not one letter at a time. This is the way undo works in most environments, including emacs, vi, TextEdit, AppleWorks, sam, acme, Word ...
David