Well, when sites with premium adsense account are doing it what is wrong when smaller sites do that? I think the AdSense team should first look into the premuim accounts who can blend ads to like navigation or content links and then descend on normal accounts. Its the premium accounts which make use of this trick more than any other small sites.

I think Google should come down on everyone doing this and enforce the creative standards set out in the program. As someone who pays to be in the AdSense program rather than profits from it I want qualified clicks...not just any click a site can trick a user into making.

I can understand websites that do this: it is a simple tactic that boost CTR. This is the very same tactic google itself used when it moved the ads closer to the organic results.
The adsense FAQ however are pretty clear on this point: one should clearly see the difference between the google ads and the website content. If you blend too much and the difference is not obvious, then Google can reject your site.
Read the Adsense TOS and FAQ: you'll find all that can make your CTR take off by looking at all that's forbidden...