After some research & trials, these settings have worked robustly for me. These steps will setup the basic defaults in Win XP SP3 and Word 2007 (they have not been tested on Vista or Win7 or versions of Word, but I would expect them to be similar):

1. Set your preferred language in the Control Panel|Regional and Language Options|Regional Options dialog
2. Set your preferred language in the Control Panel|Regional and Language Options|Languages|Details|Default Input Langage
3. Go to Start|All Programs|Microsoft Office|Microsoft Office Tools|Microsoft Office 2007 Language Settings and add your preferred language to the ‘Enabled editing languages’ list box if it is not already there. Then in the bottom section of the same dialog box, set your preferred language as the ‘Primary editing language’.
4. Start Microsoft Word itself and go to the main menu tabs and select Review|Proofing|Set language and then select your preferred language and click on the Default button, which will bring up a dialog asking “Do you wnat to change the default language to ? This change will affect all documents based on the NORMAL template”. Click on the Yes button and then the OK button to return to Microsoft Word
5. As a dutiful Microsoft follower, reboot your machine (some changes in the Regional Settings do not take effect till after a reboot).

At this point it is very convenient to customise your Status Bar in Word to display the current dictionary language being applied to the current position in your document. Right click on the status Bar in Word to bring up the Customise Status Bar dialog and then click on Language if it is not already selected.

Word is actually quite smart – you can set different selections of text within the one document to be spell-checked against different language dictionaries when you do a spelling check. It works similarly to the way you can set some text to display as bold, other text as italic and the remainder of the document as plain text. If your preferred dictionary language is, say, English(Australian) then you can have some text spell-checked against that, other text against the English(U.S.) dictionary and yet further text in the same document checked against the French dictionary – without changing your default preferred language setting at all.

You do this by selecting the text you wish to assign (or Ctrl-A for the whole document) then selecting the particular language dictionary you want to allocate to it from either the main menu’s Review|Proofing|Set language dialog box or from the dialog box that comes up when you click on your preferred language setting displayed in the Status Bar.

Hope this helps,
John