KB Article: http://support.microsoft.com/kb/833714

INTRODUCTION

When you try to edit a Microsoft Office document that is stored in a document library of a Microsoft Windows SharePoint Services Web site, you may receive one of the following error messages, depending on the version of Office that you are running.

2007 Microsoft Office suites

'Edit Document' requires a Windows SharePoint Services-compatible application and Microsoft Internet Explorer 6.0 or greater.

Microsoft Office 2003 and earlier versions of Office

'Edit Document' requires a Windows SharePoint Services-compatible application and Microsoft Internet Explorer 5.0 or greater.

For example, you experience these symptoms if you click a Microsoft Word document in the document library, and then click Edit in Microsoft Office Word.
Additionally, when you click New Document in the document library, you may receive the following error message:

The document could not be created. The required application may not be installed properly, or the template for this Document Library cannot be opened. Please try the following: 1. Check the General Settings for this Document Library for the name of the template, and install the application necessary for opening the template. If the application was set to install on first use, run the application and then try creating a new document again. 2. If you have permission to modify this Document Library, go to General Settings for the library and configure a new template.