Assuming MF increases the probability that a legendary or set item will drop is incorrect.
Drop rates were adjusted in two separate patches. 1.03 quadrupled the amount that dropped. This was not specific to legendary or set items.
In 1.04 the legendary or set item drop rate was doubled.
So, the question is. Were legendary and set item drop rates increased just once or twice?
Now. Magic find. When you kill a monster, it first checks whether it will drop anything at all.
Potion, gold, item, gem.
When it gets to checking if it will drop an item, if yes it then checks FIRST, before any MF comes into play, if the item is a set, then legendary, then rare, then magic and so on.
If your lucky enough to hit a item thats a ring thats a set, the game then looks at your MF.
The item then checks for how many affixes, and this is where mf comes to play. It increases the odds [very meagerly] of rolling more affixes.
There is debate about whether or not increases the quality of said affix rolls as well.
Its possible that gear/para based mf is different then nv mf, with nv only increasing the probability that an item will be a set or legendary.
No. for all the long hours i have put in, many many times I have had low mf and no nv and a leg or set drops. My calmity and nats ref both dropped with 2 or less nv and little gear magic.
There was a discussion on US forums about drop rates and it was states that they were adjusted, because there are more players.
From Bashiok (http://us.battle.net/d3/en/forum/topic/5150764997?page=3#49):
What I said, and what is true, is that with far more players and an increased proliferation of item trade, we have to factor in how many items are being found by players and how quickly a player can gear up by 'sourcing' items from others through trade and the convenience of the gold auction house.
My question now is how the rates work, there are two scenarios I can imagine:
(I totally made up the numbers)
1. The droprates where adjusted by lowering the chances for Legendaries... lets say from 0.001% to 0.0005% or something. So my Magic Find (and therefore Nephalems Valor) will still increase the chance for a Legendary to drop, e.g. with 100% Magic Find the chance would be 0.001%.
2. The Legendary droprates are fixed and influenced only by the number of people playing, so all people have the same 0.0005% chance of finding a Legendary no matter how much Magic Find they have.
It would be nice if a blue could clarify this ;)