Magento: Set Limit to compare products

Create A small extension for the requirement

Create a file:
app/code/local/Sushant/Catalog/etc/config.xml

<?xml version="1.0"?>
<config>
    <modules>
        <Sushant_Catalog>
            <version>0.1</version>
        </Sushant_Catalog>
    </modules>
    <frontend>
        <events>
            <catalog_product_compare_add_product>
                <observers>
                    <Sushant_Catalog>
                        <type>singleton</type>
                        <class>Sushant_Catalog_Helper_Observer</class>
                        <method>limitProductCompare</method>
                    </Sushant_Catalog>
                </observers>
            </catalog_product_compare_add_product>
        </events>
    </frontend>
</config>

Helper:
app/code/local/Sushant/Catalog/Helper/Observer.php

<?php
class Sushant_Catalog_Helper_Observer extends Mage_Catalog_Model_Product_Compare_List {

    /* The limit you want Ex. : 3 */
    const COMPARE_LIMIT = 3;

    function limitProductCompare($event) {
        if (Mage::helper('catalog/product_compare')->getItemCount()<self::COMPARE_LIMIT) return;

        $session = Mage::getSingleton('catalog/session');
        Mage::getSingleton('catalog/product_compare_list')->removeProduct($event->getProduct());

        $session->getMessages()->clear();
        Mage::getSingleton('core/session')->addError('You can not compare more than three products to compare. Remove one and try again.');
    }
}

Enable Your module :

<?xml version="1.0"?>
<config>
    <modules>
        <Sushant_Catalog>
            <active>true</active>
            <codePool>local</codePool>
        </Sushant_Catalog>
    </modules>
</config>