I also encountered this problem. I called ereg_replace from function such as this:

function replace_var($var, $replacement, $v) 
{ 
return ereg_replace("\{$var\}", htmlspecialchars($replacement), $v); 
}

Call to this function was
$form = replace_var("MODEL", $model, $form); 

$form is piece of HTML, and MODEL is template variable defined in HTML code like {MODEL}

$var is passed to my replace_var function as is.