Actually it does but you need to be in the right perspective, the Document Studio one.
Update 2012.03.09 – actually you might be in the right perspective and the palette would still not work. If you are in the right perspective and the palette still doesn’t work you need to reset the perspective ( from the Window\Reset perspective menu). See this for more details.
To help with the explanation let me add some background on Eclipse Perspectives. RPE Document Studio is an Eclipse application that contains two distinct components ( or features): the RPE Launcher and the RPE Document Studio.
Each of these components has a distinct purpose and each come with its own perspective. Read the above link for more on perspectives but a very simple definition is that a perspective is a collection of views and editors in an Eclipse application.A perspective also defines what actions (such as adding a palette element in the template) are allowed. And this is the root problem: the Document Studio perspective allows using the palette to add elements to your template while the Launcher perspective doesn’t.
So how to tell which perspective you are using? Simple: look at the top left corner of Document Studio, right below the toolbar.
Document Studio Perspective
You can see that the text element is selected and moving the mouse in the existing paragraph element highlights the paragraph in blue.
You can see that the text element is selected yet moving the mouse in the existing paragraph element does not highlights the paragraph in blue as it happens in the Document Studio perspective.