OpenOffice is a resource hog, but try it on the LiveCD, if it is workable then you can go ahead and install it, you should get better performance with an installation than a LiveCD, so let the LiveCD be a guideline.
It won't be workable on a live CD in only 256MB RAM.
OpenOffice on my box consumes about 130MB or memory for a spreadsheet I have had open for a few days now. Provided you use a light window manager (fluxbox or something similar) you should be able to use OpenOffice just fine.
Why can't they create an OpenOffice lite - same thing as openoffice, but without all the tools.
Just a basic wordprocessor/spreadsheet with which you'll still be able to read documents created with the full openoffice version, and do a few edits here and there if needed.
Most users don't need all the advanced features of openoffice anyway, most will use the basic wordprocessing/spreadsheet tools and tasks.
I cant really comment on the impact it will have ob Puppy, I know however that the V3.0.2 Oracle built version is flying ! (Compared to the older versions anyway)
BTW, if you can get hold of RAM for that box, upping a P-III's memory to 1GB will let you run pretty much any distro. I have a 1.2GHz Compaq Evo laptop with 1GB RAM and a 5400rpm drive. Runs the latest Ubuntu just fine. Sure, it's nothing as responsive as my dual core pentium whatever box at work, but it's not particularly slow either. You can get normal desktoppy stuff done without much hassle.