Good luck with this by the way
i have read up a bit on wordpress mu and tried to install it locally but its been a serious pain. got a few books to read but still need to decide which route to take
Yeah installing it locally generally well be a pain for the novice user, since you would need an install of Apache (although Mac OS X has this preinstalled, see Web Sharing), MySQL and PHP. What's important to note though, is that this would mean hosting you site from home, which for many people, is slow, and of course, would require you to leave your computer on and connected to the internet 24/7. This isn't an issue for everyone, but I would recommend getting some paid hosting for this, just so you don't have to worry about it.
Of course, if you want to use iWeb and just link to blogs at WordPress.com, that should be OK although you won't be able to make the blogs match the design of the iWeb site most likely.
have each person as an author on my wordpress.org and have them post in categories such as "manchester" or "birmingham"
Just want to make you clear on this - hosting a wordpress.org blog would still require you to have a server to host it on - WordPress.org does not provide hosting, unless you mean WordPress.com, which can host WordPress (but not WordPress-mu) blogs. (WordPress.com is built on WordPress MU).
That does seem like a pretty interesting idea though, just make sure that you have permissions set correctly, although I'm not sure if it's possible to limit a user to just one category, but there could be a plugin that allows this. Also, keep in mind that this means that all posts will be displayed on the front page. It is possible to have a different front page set up, with the blog posts on another page, but of course, this will mean that the authors will all be posting to the same blog still, although it shouldn't be a problem to just link to each category from the front page, and treat them as separate blogs.
If I was in your position however, I would just use WordPress MU. If I recall correctly, t's a bit harder than standard WordPress to set up, but it works great and I have used it in the past to set up multiple blogs on one site. Of course, if you have any issues setting it up, let me know and I'll help you out.
Anyway, when you do decide what route to take, let me know, I'm curious to see how this turns out.