Wrap certain word with using jquery

Question

I have the following div:

Answer 1

I did a proof of concept with some modifications from what you originally had. See below,

DEMO: http://jsfiddle.net/cgy69/

$(function() {
    $('div').focus();
    var x = ['SELECT', 'WHERE', 'FROM'];
    $('div').keyup(function(e) {
        //console.log(e.keyCode) ;
        if (e.keyCode == 32) {

            //using .text() remove prev span inserts
            var text = $.trim($(this).text()).split(' ');            
            $.each(text, function(i, v) {
                $.each(x, function(j, xv) {
                    if (v.toUpperCase() === xv) {
                        text[i] = '' + v + '';    
                    }                                        
                });
            });

            $(this).html(text.join(' ') + ' ');

            setEndOfContenteditable(this);
        }
    });

    function setEndOfContenteditable(contentEditableElement) {
        var range, selection;
        if (document.createRange) //Firefox, Chrome, Opera, Safari, IE 9+
        {
            range = document.createRange(); //Create a range (a range is a like the selection but invisible)
            range.selectNodeContents(contentEditableElement); //Select the entire contents of the element with the range
            range.collapse(false); //collapse the range to the end point. false means collapse to end rather than the start
            selection = window.getSelection(); //get the selection object (allows you to change selection)
            selection.removeAllRanges(); //remove any selections already made
            selection.addRange(range); //make the range you have just created the visible selection
        }
        else if (document.selection) //IE 8 and lower
        {
            range = document.body.createTextRange(); //Create a range (a range is a like the selection but invisible)
            range.moveToElementText(contentEditableElement); //Select the entire contents of the element with the range
            range.collapse(false); //collapse the range to the end point. false means collapse to end rather than the start
            range.select(); //Select the range (make it the visible selection
        }
    }
});

You going to extend this further to handle

1. Backspace
2. HTML contents from previous inserts
3. Cursor position Partially done, editing in the middle would still mess up the caret.

and more..