Luminous Landscape is waxing poetic about Panasonic's video feature that uses just a portion on the image sensor. http://www.luminous-landscape.com/reviews/cameras/panasonic_gh2_11_mode_revealed.shtml Why not use a larger portion of the sensor then crop the resulting video. This would allow you to remove image shake caused by camera movement. You could pick two frames and define the center of each frame the computer would then align the frames in between that would give the smoothest motion.
What you're referring to seems to be basically what video deshaker filters do now.