After meddling around some more, it seems that Outlook is not able to
associate the dictionary or the lookup table suggested corrections during the
spell check.

Invoking the spell check explicitly brings up the pop-up that is supposed to
suggest a replacement word, but the replacement area is empty at all times
for any misspelt word!

I compared two machines running Office 2007 and the settings are exactly the
same. While spell check and auto correct do not work on my machine it works
on the other machine.