I'm sure there's some awesome tool out there that integrates everything needed for usage documentation but I'll tell you what I use!
I use wink to grab screenshots of the application in use. I tend to fire it up and just grab loads of screenshots as I walk through the application, or even just a part of the application. Next, I edit the project in wink to remove redundant screen captures, re-order them and position the mouse on each frame. I then add highlighting which is usually just a nice box around the part of the screen I am demonstrating. Wink allows you to overlay the images with informational boxes and arrows, I then export the project as html and use the numbered, exported png images as the base for my documentation.
I tend to drag them into OpenOffice Writer (or whatever you are using for typesetting) and supplement them with more information - ie a few paragraphs top explain what the user is doing and why.
We use acrobat to output this documentation and providing your table of contents is done properly, it can insert bookmarks in the pdf to enable jumping to relevant sections.
The main benefit we get from wink is that it is very easy to re-grab shots when things change and it can output to flash to provide nice, snazzy demos of small pieces of functionality for posting on the web.