I just checked in a new diff engine from phpwiki 1.3.3 (GPL). It can display diffs line by line and highlight the changed words. I also added a diff display to the edit conflict screen.
I'm very impressed with the phpwiki project. They are also working on internationalization issues; I think we could do far worse than check out what they have come up with.
Axel
wikitech-l@lists.wikimedia.org