I use smarty, and have had good success. It seems to be stable, and have good features. I also use phplib for database and session support - I don't know whether there is any "tie-in" between phplib templates and other features.
I debated whether to use a template or go with class-generated HTML. Since I have to work with designers I chose the template option. ( I've run into problems that probably could have been solved with the class solution.)