I never heard that there was any special reason for not using it on Egyptian cotton sheets. Perhaps it's because that's one of the finest grades of cotton. Most cotton, including pima cotton, needs no enhancement.
Fabric softener used on diapers, towels, washcloths, sheets, and pillow cases makes them fluffier, but it coats the fibers with some substance that makes the fabric less absorbent.
Some people are sensitive to the ingredients in fabric softeners, especially on bed linens that they're in contact with for hours at a time. They even have to think about residue from it remaining in the dryer and getting onto the next load of clothes.
The best use for fabric softeners is for synthetic fabrics or poly/cotton blends. It reduces static and keeps the fabric from clinging together. I prefer the kind of fabric softener that comes on a small paper sheet you add to the dryer and discard after the load is done. In fact I only use half a sheet at a time – that's enough.
For more information, get on Google.com/advanced_search and enter "cotton" on the top line and "fabric softener" on the phrase line. The Wikipedia article has a link to a Scientific American citation as well.