A bit of both sounds like a good idea, as for the graphics part it should probably be all general graphics for MC, like dungeon bosses and puzzle related stuff from older games in MC style, things that could easily be incorporated into the engine once the basics are out of the way. Before that I think that getting together a large amount of ripped MC graphics might be a good idea, if you could help get this topic started back up:
http://www.zfgc.com/forum/index.php?topic=34025.0, namely the MC sprites part, it would probably be a big help to the engine.
I think that when the engine is finished, or far enough along that work can be started on a full game, that we should start with a remake of an older game, that way there are some boundaries so things don't get too out of control with everyone wanting to do something different on a custom game. When it comes to remaking an old games there probably won't be too much of a need to modify the engine as most of the general stuff in older Zelda games has made it to Minish Cap. I personally would like to continue on with LA but its up to the community as a whole once the engine gets far enough along.
Gathering together some MC sprites for the resource topic should be perfect for you Zeemo, from the looks of your DA account you have a pretty good amount of sprites already collected together.