Microsoft's lucrative Office applications suite faces a challenge from the man who co-founded Hotmail a decade ago.

Stanford-educated Sabeer Bhatia became something of a national hero in his native India by selling what was then the first browser-accessible email system to Microsoft for £200m in one of the first coups of the dot-com boom.

It was a small deal by later standards but it involved a round of high-stakes bargaining worthy of a Poker championship, during which Bhatia repeatedly turned down huge sums to reach the maximum he reckoned he could get out of Microsoft.

Now some of that money has gone into a service called Live Documents, a suite of online applications similar to GoogleDocs - but better, according to Bhatia's company Instacoll.

It is described as a hybrid online-offline suite because, though you can use it from any browser supporting Flash, there is also a desktop client that plugs into Microsoft Office to provide collaboration and synchronisation features.

Instacoll chief technology officer Adarsh Kini said one advantage of the system was that it breaks the 'lock-in' to Microsoft formats by supporting the ISO-standard Open Document Format.

But it also supports features introduced with Office 2007, including table styles and databar conditional formatting in Excel, and live preview in Powerpoint. "Thus Live Documents allows consumers and businesses to derive the benefits of Office 2007 without having to upgrade," Kini said.

The company claims it cannot be sued for copyright infringement because of a court ruling that this does not apply to "look and feel". This is another blast from the past for Microsoft, because the precedent was set when Apple tried to claim Windows copied the Mac interface.

Live Documents is the result of three years's work by 32 software engineers in Bangalore, India's Silicon Valley. It will be free, complete with 100MB of storage, to private users; companies can buy the service hosted either on their own servers or a remote machine.

Currently then system is available only as 'a private beta, on application' at the company's site.