I'm guessing if it is the better quality of muslin compared to the thin inexpensive kind that is also available, then it would be fine.
I keep reading on blogs, yahoo groups etc that lots of people love to use muslin, even on the fronts of quilts.
I haven't used sheets of old blankets for batting but do use inexpensive flannel as batt and of course the reg. warm and natural. I don't know why you couldn't use old blankets, especially for kids quilts, picnic quilts or to have in the car to keep kids toasty on cold nights in the car traveling etc.