In a thread about the wonderful "writes upside down" spacepen, member eriko explains why pencils in space can be quite deadly and unsafe:
Realize that a piece of graphite between two conductors with enough current behind them becomes a light bulb. Briefly. This isn't good in sea level atmosphere, in a pure oxygen atmosphere, this is deadly. Gemini used mechanical pencils, which got rid of the wood, but left the graphite, and graphite+oxygen+spark=fire. Bad.