The only places I've heard of that do this are the most budget of holiday parks in the UK. The type of place where the TV is bolted down and you have to pay for your own electricity.
Presumably, bed sheets are so basic that they aren't even listed in the star criteria. Even in youth hostels, you may have to put the sheets on yourself or they might cost extra, but you don't need to bring your own.
I live in Europe and have been to my fair share of hotels (though mainly in northern europe), and have never had to bring my own linnens.
Never heard of it either.