It depends on the merchant.

A cash-only merchant might attempt to haggle with a Westerner in Euros or dollars. That happened to us often - although I'd usually direct the negotiations back to LE since that's what was in my pocket.

Cab drivers tend to quote LE, although if you do a day-hire you may be able to negotiate in dollars or Euros. (Plan on using LE though.)

Nearly all of the restaurants we visited accepted MC/Visa. We never used foreign currency at a restaurant. We had one or two meals that were fairly off the beaten path - no other tourists - and we used local cash.

I definitely second the advice to obtain small change whenever possible. If you have a 200LE note, use it at a hotel where you know they will make change. If you are in a hotel with a bank branch inside (common at larger hotels), they'll make change for you without any hassle.

It took me a couple days to stop overtipping people. Having coins and 5LE notes onhand is essential.