A friend has asked me to ask you which currency he should take to Cancun. Sterling, dollars or the local money.

Mexico is the only country in Latin America were US dollars do not circulate like a local currency. Tell your friend to take US currency and get a better exchange rate there. I would use credit cards to pay for all purchases and get Mexican Pesos from ATM's
In all Central America, US dollars is the unofficial but powerful currency. cial currency.

In the Cancun area, US dollars work just fine in most places. However, he should get Mexican Pesos at an ATM in Mexico just to be safe. Also realize that credit cards are not that widely accepted in Mexico.

Where in Mexico have you been, credit cards are accepted all over Mexico and the rest of Latin America. Most stores have a minimum when accepting payment with credit cards due to the fee they have to pay their local bank. But I have never seen a place where credit cards are not accepted. If you are referring about AMEX and Discovery, I agree, but VISA and specially Master Card they are widely accepted.

Many thanks for your advice, I shall pass it on

Withdrawing peso from an ATM is the most efficient and cost effective way to go.

You can also change money at the casa de cambio (change windows) along the streets in most towns.

I have heard that in Cancun US dollars are accepted, but personally would feel more comfortable using the currency of the country.

The places that I have found that do NOT accept charge cards are small, local owned hotels, restaurants, and shops. There are many of them (and this is in Puerto Vallarta which has lots of tourist visitors).

You'll find more extensive discussion of this over on the Latin America board of Fodors.