I had a similar project idea during 2009 May and had done some amount of coding for that. The project was to have an IBUS input method which can do letter prediction as well as word prediction. The prediction is based on ngrams. Since it is based on ibus, it works on all desktop applications. You can see the screenshots of prototype from here, here and here
The core code was ready. It was written in python and use ibus-python. Unfortunately I did not get time to spend on this project for a long time and currently this project is not there in my top priorities. Since I see many people interested in auto-completion or predictive text entry, I uploaded the code here http://github.com/santhoshtr/ibus-sulekha . It is not in a working state as of now, but I would be happy if anybody interested in taking it forward. I wrote a small documentation on algorithm here, and feel free to contact me if any help is required.