I should mention that while I use the Google Documents service and like it, I have never used it for a project like the one you describe. All I know is that it is promoted to be useful for just that kind of thing and there are some user testimonials to support that. But bear in mind that the service is in beta and may have some rough edges.
One limitation to be aware of is a document size limit of 500 kB plus 2MB per imbedded image. But you can have a huge number of documents and even hotlink among them, so if the file size becomes restrictive, you could have a file for each chapter or otherwise break it down.
Also, the files are stored in HTML, which may be fine for editing content, but once that is done and you are ready to do the final editing of the formatting, you will probably want to dump it into a desktop word processing application.