Thank you Leo and Richard for your insightful comments.
I suppose this discussion highlights the areas that I haven't really nutted out yet, and also how my very new knowledge of the whole system fits together. Here are some additional thoughts to help clarify my position.
Firstly, I'm still contemplating the most appropriate pathway, such as an add-in, extension, or stand alone interface using ArcEngine.
Secondly, the feature I want to implement is more of a visualisation tool. This will mean I will use a custom renderer to display some data in my own dockable window (current thinking anyway). At the very least, as long as I can access the lat/long info of the data, I should be able to restrict the display to datasets only in the allowed region in my own display window. At least, this is what I'm hoping.
Leo, you've raised some good points with the interplay with ArcMap, should I go down the extension to ArcObjects pathway. Perhaps this is enough reason to only consider the add-in or stand alone option for now. That is, unless you foresee other issues with these options?