I am planning to be in Lisbon for a week but will be living on the outskirts (in Seixal). Do you recommend renting a car or using public transportation?
Public transit, without a doubt. In Seixal, you're already in the metropolitan area.....you wouldn't want to drive!
We just got back from Portugal. Having driven almost 4000 km (Barcelona west to A Coruna, then south through Porto to Lisbon, with lots of side trips), I was happy to turn the car in and use the metro, trams, trolleys, trains, funiculars, taxis and buses. We went all over the metropolitan area, out to Cascais, out/up to Sintra. Yes, we had to get out and walk some - perfectly do-able, since I was not wearing 4" spike heels like I saw many women wearing (yikes!) - but it wasn't a big deal. I think it would have been very stressful trying to do that with a car. There are so many one-way streets, two-way streets that look one car wide, streets that are only for residents or taxis, and finding a gas station to fill the rental before we turned it in was difficult. Use public transportation!
Was in Lisbon and Porto last week. A car is worthless when within 20 km. of downtown of either city. Lisbon is really tough. I did drive thru and around the towns a bit, but parking is terrible and transit is good. Get the Lisboa Pass if traveling much -- nice to be able to jump on a bus/subway for 1/4 mile rather than walking to save a buck (err, a Euro).