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I need some advice regarding the best way to implement inline editing of a data view web part styled using custom xslt.

The data view web part gets the data from the list and would be styled as below:

I wish to let the user inline edit each item displayed by the data view web part as shown here :

I plan to create a customised edit form for the list. Then show the user this form for the list item in an Iframe or jquery modal window when they click the edit button.

Are there any limitations to doing this in Sharepoint 2010?

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you can build this in SharePoint. I would advice building it as a custom web part. With 2010 the options with visual studio are great. Here's a beginner tutorial, and a book that covers some .net solutions for sharepoint.

-hope this helps

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