Tobacco was certainly used on set by Sean Astin and the other hobbit actors.
For the pipe-smoking scenes, the actors were presented with the choice of either a mild pipe tobacco or an herbal non-tobacco product. Astin believes that all the hobbit actors in the Fellowship opted for genuine tobacco. “Every hobbit is a good hobbit,” he says, “and a good adult hobbit loves his pipe tobacco!” He claims that none of the other actors, during filming, took pipe smoking as seriously as he did.
Pipe and Tobacco Magazine: A Pipe-Smoking Hobbit From The Shire
No mention is made of the human actors, but in an AMA with Elijah Wood, he mentioned that Sir Ian had the scent of Old Toby (i.e. tobacco) on him
Q. What does Sir Ian Mckellen (Gandalf) smell like?
EW: He smells really good! He smells of a sort of masculine incense. I
just…I can't put my finger on specifically what notes of the scent are
there, but there's something very pleasant about the way that he
smells. Incense definitely comes to mind. What an interesting
question.
Q. And Old Toby
EW: That was great.
Elijah Wood here. Again. AMA (Ask Me Anything)