I've noted several providers, including a couple of better-known ones, using RFC1597 addresses internally. While not a Really Optimal Solution, it does work, and if you find yourself with only a couple of class C's to work with.. I'd probably rather preserve them for my customers, and go with whatever I had to internally, as long as packets still got from A to B.
The only services that should be affected by the use of such "bogus" addresses will be traceroute and any routing information passed by the device.
Unfortunately that's not quite true. There are a variety of services which rely on messages received from intermediate hops that would break if the the sending host happened to filter out RFC1918 addresses and a part of the network were using them. Probably the best example is Path MTU Discovery. --jhawk