As far as character design goes, a more surreal bent definitely takes the cake. Fo' example, I think the disproportionate humans of Sonic Unleashed mesh so much better with Sonic and co. rather than the realistic (but considerably stiff) humans of SA2, Shadow and Sonic '06. And then there's the gapping difference between the colorful, animal-like badniks found throughout the series and Eggman's totally sterile-looking army in Sonic '06... Strangely enough, I never had such a problem with the similarly-designed GUN robots of SA2.
NOW, as far as level graphics are concerned, I can find merits for both styles... In some people's views, the role of videogames (as well as animation) is to exploit the medium and give the player an experience that's impossible in real life. That includes spiriting the player away to improbable locales, which are in no short supply in the Sonic series. Some of the most memorable levels are those which are far removed from reality... Green Hill, Spring Yard, Collision Chaos (and the rest of Sonic CD, more or less), the S3+K Special Stages, Hang Castle and Egg Fleet. All of these places are skillfully designed, completely ridiculous and wonderfully abstract.
While it's always fun to imagine Sonic glazing through some make-believe landscape, there's also something undeniably cool about the prospect of him traversing locales close to our own. Imagine, Sonic running down the side of a skyscraper, Shadow grinding the cables of a Golden Gate'esque bridge, Gamma shooting up parasols at the beach... What makes moments like this so tantilizing is that it feels so real that it's almost believable. It's our own familar world, sure. But with Sonic and co's exaggerated abilities, we can maneuver through it in ways we never thought possible.
If pressed for a choice, I'd say I prefer the realistic style. It's fun to gaze at the artistic frills of Sonic's more abstract titles. But it's always in the more realistic settings (specifically those of SA and SA2) that I find myself thinking "My God. Sonic is so friggin' cool."
GREG THE CAT makes an interesting point when he says that a mix of the two categories would be nice. I think Sonic 2 managed to get closest to that ideal. It has totally believable locales (ruins, a casino, a mountain system, an oil refinery, ect) but the graphics themselves are bright, colorful and geometric, akin to the more abstract Sonic 1 and Sonic CD.