I guess the question you'll have to answer is how accurate do you want it to be and how humanoid do you want your character to be? There are several high performance 2D physics libraries around, eg Chipmunk. The problem with animating using physics is simple. The character needs to move in an intelligent and dynamic way. On flat ground your character might walk fine... but how does he react to tripping on a step? Rather than simply playing an animation and moving him around, you need to have an intelligent walking algorithm that can deal with various obstacles he might be presented and even to keep him standing. There are various solutions that can make your life easier. One is to treat him like a puppet... this means you "carry him" by a force that tries to keep his head a set distance from the ground (probably a spring pushing his head to a point above his current centre of gravity by an appropriate distance). Assuming the joints have appropriate limits set, you can then animate his limbs to look like walking with a simple walk cycle that just applies a force to his feet to make him step on the next piece of scenery. I think his walking should effectively be independant of his balancing (possible deactivating when he is stationary, leaving only balance) ie if a force pushes him one way or other his legs will walk. This would mean you can animate him by simply applying a force left/right. In practise this'd mean in the absence of force he'll stand... when the player tries to make him move, a force will be applied that would off-balance him and his leg animation will run (combining with the balance he should stay up). As for other programs that have used this method, I'm not... but it's something that people have tried often, how to exert explicit control over a physical environment (or blend motion captured animation with physics). There is a very nice package that illustrates this called Endorphin. Motion capture can be applied in a way that effectively converts it to muscle motion, the character can be animated with various AI operations (like balancing or reaching for objects) and to blend in and out of canned and dynamic animation as appropriate.
Good luck!

Dan