The city is really small with its around 20 000 inhabitants, and the city can easily be seen in a day. We arrived early in the morning and rented bicycles (4 dollars/hr) to ride around on the rough stone paved streets that made up the old city. It was a really quiet and relaxing place with plenty of small parks to have a picknic and many small restaurants with ocean view for dinner. The main attraction of the city is probably the lighthouse (faro), where lots of people go up (about a dollar entrance) especially around sunset to get a view of the city.
There are also a few hotels and hostels, but I think as long as you get there early and take a evening bus or boat out you will feel that one day is enough to explore the small city of Colonia del Sacramento.
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