It had been working but recently stopped for me. I must’ve installed an update or something that caused this to become corrupt.
I’ve trawled a few internet blogs and they suggest there is probably a problem with the ActiveX control provided by the Microsoft Office client products that give this additional functionality.
Try the following:
1.If you have any pre-Office 2007 products installed on the machine, run Setup and remove the Windows SharePoint Services Support component.
2.For each Office 2007 product, run Setup and ensure the Windows SharePoint Services Support component is installed (under Office Tools).
3.You may also need to run a repair the Office 2007 product as it is likely something hasn’t correctly installed.
I’ve found another blog which suggests a registry change, however these can be quite risky: http://dotnetninja.wordpress.com/2009/01/12/how-to-open-sharepoint-documents-in-edit-mode-with-internet-explorer-6-and-windows-xp-without-regfix/