Thanks for your replies all. So to summarize:
1. You can apply for permanent residence (outland) while in physically in Canada without having to go to the US or other country.
2. Pro & Cons:
Inland application
Pro - Can apply for work permit immediately upon sponsorship true - but it will be approved only after the completion of the first stage which currently takes 11 months, so you're better off with an outland application
Con - Cannot leave Canada until process is completed.
Con - Takes longer than outland application. for most countries yes - and definitely for US nationals
Outland application
Pro - May leave Canada during application process (ie: go home for family matters, etc).
Pro - Process is quicker than inland application.
Con - Cannot apply for work permit until application is completed (is that true?).you can apply - but it's a separate process than the PR one. So to clarify> there is no work permit attached to the outland PR application, you will have a work permit automatically when you become a PR. However, you can apply for a work permit on your own. Either find an employer willing to go through a LMO (Labour Market opinion) and apply for a work permit on your behalf (difficult but not impossible),or, if you are a US national, have a look at NAFTA program ( enter Nafta as a search word on this forum and you'll see)
so - you can stay in Canada and work if you find a way to obtain a work permit, and apply for PR at the same time. the processes are independent.
There is also a thread for US applicants outland, if you have some more specific questions: http://www.canadavisa.com/canada-immigration-discussion-board/us-outland-applicants-thread-t106068.1005.html there are lots of US/Can couples applying, you'll get all the help you may need.
GOod luck putting your application together!
Sweden
If anyone has any other points to compare/contrast the outland and inland application processes please add it to the above. Thank you so much. if you look at the first post on top of this forum, you will see a post by Leon - it summarizes the advantages and inconvenients of both procedures. There is a list of questions afterwards, but the first post should be already informative enough!