What are the consequences of a recommendation from someone in the distant past? I am in the not completely unusual position of having an eight year period between my Master's and PhD degrees. During this time I was gainfully employed in a completely unrelated and non-academic field.

I have now graduated from a PhD and am looking for work.  Many good post-doc and academic jobs require three referees to speak on one's behalf, and to be competitive these references must surely be academics.  

I had a great relationship with my Master's supervisor, including co-authoring papers together, and I believe that despite the 12 years since I was her student she could still speak credibly, confidently, and highly favorably on my behalf.

In the non-academic world it would stretch credibility to call upon a reference from such a distant point in the past.  But for an academic position, I think things could be different.

What are the potential advantages and disadvantages of using her as personal reference?  Are potential post-doctoral supervisors or hiring committees likely to discount her reference as stale and irrelevant?
If research is a substantive part of the jobs you are applying for, then you should be wary of asking your Master's supervisor for a letter.  It could work out OK, but there's a serious risk.

The issue is that hiring committees want information about your current research, rather than what you did for your Master's degree.  If your Master's supervisor has read some of your recent work and is capable of discussing and evaluating it in detail, then it will be a useful recommendation.  However, you don't want a letter that focuses on the past and just includes a brief paragraph saying "And the Ph.D. research seems to have gone well, but I don't really know anything about it."  That could actually hurt your case by suggesting that you couldn't find three people who understand and think highly of your more recent work.

A strong letter that focuses on the past is certainly better than a weak letter, so it could be your best option.  You might also talk about this issue with your Master's supervisor, and see how compelling and up to date a letter she thinks she can provide.  If she has read or wants to read your recent work, then that's great; if she is hesitant about the idea of writing a letter, then I would ask someone else.