In the spirit of finding a solution (versus an algorithm), have you reviewed CPAN's Text::WordDiff? It appears capable of doing what you'd like. In the authors words: 
To diff source code, one is still best off using 
Text::Diff. But if you want to see how a short story 
changed from one version to the next, this module will
 do the job very nicely.

In reply to Re: diff of two strings by rgiskard
in thread diff of two strings by flaviusm

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