Hotmail co-founder Sabeer Bhatia has introduced a new contender to the growing field of web-based applications. Dubbed “Live Documents,” Bhatia describes his product as an online-offline Office suite of applications which he claims has all the features of Microsoft Office 2007 and is available online for free.

Live Documents allows users to view and edit documents within any common browser on any operating system offering online collaboration between multiple users on a real-time basis, but it is also available as an optional desktop client application that wraps around Office. Basically, this gives users the flexibility to work either on the desktop or on the browser while changes made on either side are automatically synchronized to the other side.

Live Documents has been developed by his Bangalore-based company InstaColl and targets the office productivity market, which it estimates to be $20 billion this year. Could Live Documents pose a significant challenge to Microsoft Office? Of course, that seems very unlikely to happen anytime soon. But Bhatia believes the evolving internet applications industry is just a few years away from making the propriety desktop software business redundant.