Here,
a. if I have the sheet open in Excel (2007), I can't edit it in Word via
the Edit recipients dialog box (This is not new behaviour and I don't think
it will change while Excel spreadsheets are essentially single-user).
b. if the sheet is closed when I try to connect to it, it all works fine.
This is significantly better than in Word 2003 where you simply couldn't
edit Excel data in Word. It seems to work whether the Excel sheet is .xls or
.xlsx format, and the Word document is .docx or .doc format
c. If, however, you are creating your document from a template that has
been attached to the same workbook, the data source is open and you won't be
able to edit. This is generally the case with "single-user" data sources in
Word, or has been since Word 2002.

However, I'm only using a very simple example. For this I'm using Vista
which could also be a factor. So i suggest...
d. you also try a very simple example
e. you verify that your attached template is not also connected to the data
source (even if it is the "normal" template it could be attached, but I
think you would face the annoying SQL question every time you started Word
if that was the case)
f. if you still can't get it to work, some other fact or must be at work -
in this case I doubt I would be able to troubleshoot effectively and you
could consider using the free Microsoft email support from their support
website at http://support.microsoft.com. Don't be put off by all the stuff
about charges - as long as you are within the support period (which almost
has to be the case) you should be able to submit an incident for free, and
the process should make it clear that that is what is happening.

Peter Jamieson