As Viejo said, I'd suggest choosing characters instead of sprites, 'cause you really want colour in this game. Keep the sprites for special effects and projectiles (Pegasus' meteor fist, for example). Mortal Kombat for SMS is a good example of this technique and the result speaks for itself: some screenshots
Tiles are going to be a problem when either the player or the enemy is able to jump reasonably high, high enough to fly over those other background tiles at the horizon. A non-black background is often a problem in an MSX1 game anyway.
I remember that way back...I also made a fighting game. Inspired by Bruce Lee movies..
I used a Jack the nipper II type of screen. This allowed smooth movement and large (software) sprites. I was able to have TEN sprites on one row..before it became sluggish...
And I used the hardware sprites for special effects..
This kind of screen was also used in Death Wish 3.
Limitation was that if the players moved over eachother one sprite would have the same color as the other...ah well...it worked !
Yes. Its all a matter off trade offs. I would not mind the 'problem' that wolf is adressing if the game has good gameplay and speed.
There's always a trade off somewhere. While all game companies in the 80's were facing the same technical/creative limitations, I think the quality of Konami was that they always made the right choices. In fact, the only point where they went beyond those limitations is when they made their own soundchip..
Well put, I think.
In that light, I always wondered why Konami made a sidetrip to the Msx-Music sound with F-1 Spirit 3D Special.
Probably because it was an MSX2+ game. Who knows, perhaps they were asked to provide a dedicated 2+ game to promote the system.. and since some of these systems had MSX-Music inside..
Anyway, software sprites for MSX1 means in most cases monocrome games. If that's ok for you, then go for it. If it is fast enough, I'd go for coloured characters and fast paced action. May I say that I love Hitsuji Jay?
A crappy fast try, with blatant rips off from a MUGEN character and some Altered Beast graphics
. This can be done moving all things in a blocky way: if you reserve a doble-buffer for the next frame of both characters, and make a dark textured background, it can work. Anyway, it is a fast implementation: a nice exercise for this is to take a look to some sms games as Mortal Kombat or Golden Axe. And yes, graphics should be better drawn but, hey, it is just a fast try! 
That's it, partner!
