My daughter just turned 10 ...and we have been doing simple parties at the house for years. It started off more finacially, because she wanted to invite so many friends. But, we've offered other options the last few years - and she still picks the home parties - which the last two years has graduated into a sleepover in tents.
But, I think you will be surprised with how much little girls will just like free play together. The water toys, balloons, relays all work well. Along with the other ideas you've been given. Make sure to have fun music playing - our girls often make up routines or have "dancing contest" for anyone who wants to participate.
I think though, if you have water games, etc. available for them and then, cake, ice cream and presents - you'll realize that couple of hours goes by quick.
One thing you might want to do is do the presents, cake and ice cream first - to make sure you allowed enough time - then the rest of the time is for play - you don't have to worry about cleaning or drying up in between. If you wanted to do a easy/fun craft - they make foam cup holders or visors. Then, buy some of the decorating foam pieces already sticky on one side. Last year, I sorted through the alphabet letters and spelled out everyone's names ahead of time...and had them ready to go in a bag - then had them put on and decorate and they really liked that. They had a fun craft that they made - and it was part of their "goodie bag". I like to do things that are fun crafts as part of their goodie bags - instead of "wasting" money on little fillers for bags- that they probably really won't use.
Another idea is to tye-dye bandana's - can be fun, but a little time consuming for you to assist with.
Good luck and have fun!