A mix of both. For example, when I want to pull off Scorpion's Spear special attack, I use the D-pad, because I have no idea how to pull a double-direction input with the analog (enlightenment would be nice, haha).
If I wanted to do a special attack with Hadouken-type directional input, I use the analog.
a friend of mine has a PS3 and i must say.. when i would play against him, it is definitely easier and better to use the D-Pad.. my thumbs would blister after a couple hours.. but its still better to me when executing combos, cause the D-Pad is more precise imo.. Xbox should take notes on making a better D-Pad cause the new one looks useless to me! (that's just my opinion!)