This procedure shows you how to prevent Time Machine from using all available free space on a local volume by backing up to a sparse disk image bundle stored on a shared folder on a local volume.

Time machine uses a feature of the HFS+ filesystem that was introduced in Mac OS X 10.5 (Leopard) called ‘directory hard links.’ Like file hard links, a directory that is hard linked to another directory is not actually a distinct directory, but is instead a pointer to the original directory. Time Machine uses these directory hard links to reduce duplication and save space by making references to entire directory trees whose contained files have not been modified.
To properly copy or duplicate a Time Machine backup, these directory hard links must be preserved. Unfortunately, directory hard links are proprietary to Apple. Apple discourages their casual use by third party developers because, if used incorrectly, they could create recursive directory structures that would ren …

Source: Mac OSX Hints