There seem to be two points under discussion here:
- Whether there were cousin marriages in ancient times
- Whether, such marriages were in accordance with Manu Smriti
Two types of cousin marriages were prevalent as we have seen:
Children of Brother- Sister (whether son of brother marrying sister's daughter or vice versa) getting married seems to have been common. Examples : Arjuna-Subhadra, Krishna=- Bhadra, Krishna - Mitravindya, etc
However at no cost were the children of two brothers entered into wedlock. (I am not sure about children of sisters, though- are there any stray examples?)
However, Manu Smriti (MAnav Dharmashastra) does not approve of such marriages. (Chapter 11, verse 172, 173). There is a penance prescribed as a deterrent.
While I know, that communities in Northern India, still follow this religiously, somehow, in South India this system has not only been followed, but flourished, till recently. Among some of the Keralite castes, which followed the Marumakatayam (Matrilineal system of inheritance) this kind of cousin - alliances were more common than exception.