It is a single, two-edged sword. If SQL Server authenticates to the domain, it can have access to the resources of the domain. That is both a blessing and a curse.
It means that (given the proper permissions), the SQL Server can "see" other resources such as disk, printers, etc. The server can then send mail and other forms of messages (that rely on domain authentication).
In general, I usually have one "intereface" server that uses a domain account, but has no end user connections. It does all of the "cross server" work for the whole farm. The other servers use Local System unless some particular reason forces another choice.