Writing the previous entry reminding me that I never posted the following solution.
While working on my book, The Open Laboratory 2007, I typeset everything in LaTeX. One of the features that I included was a drop cap at the beginning of each entry in the anthology, using the Lettrine package.
However, I could find no way to automate the process in LaTeX, requiring the \lettrine command to be included at the beginning of each entry. This resulted in a few entries missing the drop cap because their omission was not caught in our short development time. I worked on the book a while after it was published, fixing some errata that I found. During this time, I finally developed a way to apply the drop cap automatically to the entries. Here is the solution, simplified a bit.
% Required Packages
\usepackage{ifthen}
\usepackage{lettrine}
% Setup lettrine
\input EileenBl.fd
\newcommand*\initfamily{\usefont{U}{EileenBl}{xl}{n}}
\renewcommand{\LettrineFontHook}{\initfamily}
\setcounter{DefaultLines}{3}
% The Magic: finds first letter and first word in the proceeding text
% and passes them to lettrine
\newcommand*{\ecap}[1]{\begingroup\obeyspaces\etospace{#1}{}}
\newcommand*{\etospace}[3]{\ifthenelse{\equal{#3}{\space}}%
{\endgroup\lettrine{#1}{#2}#3}{\etospace{#1}{#2#3}}}
% Setup environment `entry' to use `entry*' with a drop cap
\newenvironment{entry}{\begin{entry*}\ecap}{\end{entry*}}
% Setup environment `entry*' so that lettrine can be manually specified if needed
\newenvironment{entry*}{}{}
This solution will not always work if the entry begins with something other than text; markup and figures can confuse it. However, for the few instances when I need to specify \lettrine manually, I can fall back to the entry* environment.
Update