Would you recommend playing survival horror on the hardest possible difficulty level to increase panic and fear level, or would you recommend playing it at a more realistic level, to keep the story and environments fresh?

I usually play games at the default difficulty when I first start them. I dont really get what you mean by " playing it at a more realistic level, to keep the story and environments fresh?"

On the higher difficulties, you are going to constantly retry and see the same areas again and again, working your way through with trial and error.