Since escaping from PHP is really just another way of echoing text, I think this boils down to personal style. I use both in different situations, with some caveats:
I lean toward the first method. When in doubt, I stay in PHP.
My PHP blocks and HTML blocks tend to be relatively large. I try to avoid dropping in and out of PHP too often.
I couldn't tell you exactly why I do this; all I can say is that I've been coding in PHP since PHP 3, and this is the method that seems to work best for me.
With all of that said:
I think the two methods do reflect two fundamentally different concepts of what your PHP file is.
The second method sees the PHP file as an HTML file that just happens to contain some logical instructions.
The first method sees the PHP file as a computer program which just happens to produce HTML as output.
As my projects have grown in scale and complexity, I've found myself leaning more and more toward the latter mindset. I'm willing to bet that if you talked to an expert in systems architecture (i.e., someone other than me), they'd agree.
Here's my general approach. I'm not 100% happy with this, but it works well enough until I can figure out something better:
Each of my .php files is separated into two blocks. The first block (at the top of the file) is pure PHP. This is where 99% of the logic happens: database queries are issued, form posts are processed, etc. This code transforms the relevant data structures into the various chunks of HTML - <select> controls, <table>s, etc. - that will be output to the browser, and loads these chunks of HTML into string variables.
The second block (below the PHP block) is the HTML block. I treat this section of the file much like a Smarty template. In other words, it's mostly HTML; I only break into PHP to output the HTML from one of the variables I constructed in the first block. There might be a little bit of logic in this section, but if there is, it's related strictly to presentation - none of the application flow is handled here.
This isn't a perfect separation of presentational and application logic, but it could be a lot worse.