A textual format facilitates merging your documentation with generated items such as JavaDoc, API references or data dictionaries. It also scales much better than word, which is hard to use for large documents. Finally, a format that allows includes allows multiple authors to work on a document concurrently.
LaTeX and FrameMaker (the two systems I have used for this) both have vastly superior indexing and cross-referencing capabilities and have either a native textual format or a textual version of their native format that can be included (MIF in the case of Framemaker). They are also both much more stable than word.
I've built tools that read data dictionaries and generate documentation that can be included into a larger document with stable indexing and two-way cross-referencing. The functional specification for This product was done with LaTeX in this way and got me another gig with the company. I have also developed a similar process with FrameMaker.
