I preferred ME1's story. I felt the pacing was better (if you ignore the repetitiveness of many of the uncharted world side assignments): the story seemed to flow, and so many of the side assignments tied into the main story. I know some of the side missions in ME2 do as well, but you have to think hard about it to realise that (for example, the colony shield mission).
I try to get all or most of the side assignments done by the time I go to Virmire, because the tension during and after that mission is astounding, and I have to go straight into the lead up to Ilos. The end part of the game (if you do Virmire right before Ilos), and the part where you first become a spectre are some of the best video game writing I've encountered (it's up there with the Landsmeet from DA:O).
In terms of characters, I have a massive sentimental soft spot for ME1 characters. I preferred Tali in ME1 (badass) to Tali in ME2 (pathetic giggling doe-eyed girl). Wrex is a classic character. Garrus has some good progression in ME2 through his loyalty mission and talking to him about what happened to his team on Omega, but I don't like him being an LI, so I'd say it's pretty equal between ME1&2. I wasn't a huge fan of Liara in ME1, because she was so child-like and insipid. She did nothing for me in ME2, although in LotSB I can see they've tried to bring things back on track. She's still not a favourite of mine though. I was a big fan of Kaidan and Ashely (although Ash ALWAYS [redacted] on Virmire). They seemed to have far more to say in ME1 than any of the LIs in ME2 do, and I felt much closer to them than I ever did to anyone in ME2. I somewhat enjoyed Jack, Thane and Miranda's romances, but with all of them I felt they were stilted (despite the attempt at deep emotional engagement) by the lack of branching conversations. They just never felt as warm or intimate as the ME1 romances.
I have played ME2 several times, and ME1 a handful more than that. There are things I really love about ME2, and things I really love about ME1. There are things that annoy me about both games. ME1's story just feels more accomplished than ME2's, and while my love of ME1's characters is tinged by sentimentality, something I readily admit, they are a league above ME2's simply because of the depth of conversation I can have with them, and the intimacy (not just physically) of the relationships.