Very slick and great filesize. I've been working on a wysiwyg document editor and am very tempted to use this. My only problem is with contenteditable in general, which is hard to convince to use <p>'s. I'm rolling my own paste function and optimistic about getting the functionality you have, but definitely not in 5k ;)

Also, do you have any idea of a resource for valid/invalid nesting rules for inline and block elements? I'm currently sanitizing to keep block elements at the top level.