From the Super Mario Wiki
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A nail falls into a board and is held down by a man. A hammer moves back and forth above the nail. The player must press the button when the hammer is directly over the nail to hammer it down. If the player hits the edge of the nail, the head will bend. If this happens again in the same direction, the game will be lost; however, if it happens on the opposite side, the nail will be fixed. If the button is pressed when the hammer is too far to the left or right, it will strike the man's hand, hurting him and causing the player to lose. If the player waits too long, the man gets impatient and starts counting down from three. When he reaches zero, the player loses the microgame.
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Additionally, the hammer is higher for each level of difficulty:
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