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I'm not sure if anyone has tried something like this before.  It doesn't completely get rid of "turn based" combat, but changes it a little.

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Action Pool

Initiative is what determines when a player can have his character perform an action.  Each character has an Action Pool equal to [(Finesse + Physical) x 5].  (Certain Talents, Items, Merits, and Flaws can increase or decrease this amount.)  In a combat "round", the character with the highest Action Pool has Initiative, and can spend points in his pool to perform certain actions.  Each time an action is performed, the character's Action Pool is reduced by a number of points equal to the cost of the action.


The character that starts a round with initiative keeps it until it one of two things happens:  he runs out of points in his Action Pool or another character takes initiative.

Taking Initiative

Any character can take initiative from any other character, as long as he has points in his Action Pool, and his current Action Pool is larger than that of the character with initiative.  To take initiative, simply pay the cost of the desired action, plus one Action point.  After that initiative belongs to the second character, until he runs out of action points or another character takes initiative.  If two characters attempt to take initiative at the same time, the one with the largest current Action Pool goes first.

Ending a Round

When only one character has points remaining in his Action Pool, the round ends, and all characters refresh their Pools.  A character who ends a round with points remaining in his Action Pool may roll those points over into the new round.

For example... three characters -  Ramie, Salina, and Triden - find themselves facing off against five Minor Titans.  Ramie has 15 points in his Action Pool.  Salina has 25.  Triden has 30.  Each Minor Titan has 20.  Triden starts the round with initiative, and begins by attacking a Titan from a distance with his bow.  Attacking costs 10 Action points, bringing Triden's current Pool to 20.  At this point, Salina could take initiative, but she choses to hold her ground, allowing Triden to act.  Triden then drops the bow and draws his Glaive to prepare for the rushing Titans - an action costing 5 points, leaving his current Pool at 15.  Triden could continue attacking, but since his Action Pool has dropped lower than that of the Titans, they can act.  A Titan takes initiative and retaliates against Triden....

Cut to the end of the round.  Triden has used all his Action Pool, as have all the Titans and Ramie.  Salina, however, has only performed minor actions during this round, leaving her with 20 points in her Action Pool at the end of the round.  She can carry these over into the next combat phase, letting her begin the round with 45 points in her Action Pool (25 per round + 20 carried over).

This looks like a fine idea. I want to quibble about your wording.

As written, this seems to say that the character with the highest initiative must act and that once a character takes the initiative, that character must continue to act until someone else grabs the initiative away. Was that the intent?

I assume not. So, there should be a waiting option. At times, the fastest character will want to let his buddies get into position or he'll want to see what his opponents are trying to do and counter it.  Imagine a melee in tight quarters and that the fastest character is not in the front ranks.

I've been lurking at The Forge for the past couple of months, and this post finally behooved me to register.  I've been designing a RPG just for kicks for a little while and have been working on a combat system for it.  What struck me was how closely your system resembles mine.  I got my inspiration for it from Fallout, an old CRPG, which uses Action Points to determine how many actions can be taken in one round.  This leads me to believe that it's probably not a new idea in the world of pen & paper.  I'm sure at any moment, someone here will post 12.7 million indie RPGs that use a similar system.

Anyway, I've playtested it a little bit and I thought I would share a few things that I found out.  One thing, I discovered I needed to use chips of some sort to keep it all straight.  I use just regular poker chips.  Just like your system, initiative is held by whoever has the most "action chips" (the red ones).  Of course, you would need alot of chips with pools around 30.  Mine run from 1-20.  When a combat round is started, players recieve as many chips as their Quickness.  Play then resumes in a psuedo non-turn based manner.  Anyone can act, in any order, but it's only when a player decides he wants to act *before* someone else is initiative checked.  

One other thing I needed to implement was the ability to "interrupt actions."  That's done when Player A is doing something that requires alot of chips, and Player B wants to squeeze in an action during that time.  It can be done if Player B will have initiative after Player A's action is done and Player B will *still* has initiative after he performs the action he wanted to squeeze in.  Does that make sense?  Let me know if I need to clarify.

At the end of the round all chips left have to be "dedicated" or lost.  Meaning that if someone wants to do something that requires more chips than he has left, he can then "dedicate" those chips (converting them into blue chips [white is for defense, but that's another topic]) to a specific action.  His first move on the next round, after everyone's pools have been refreshed, has to be what he dedicated those chips for or he cancels that action and loses the blue chips.  Am I making any sense?  Anyway, I actually have a little more fleshed out on this, but I think that's all that's necessary to give you the gist.  

But, I'm not really familiar with that many indie RPGs, so I'd be interested in hearing what some others have to say on this.

I failed to mention that this system is a close relative of the one in Feng Shui. You might want to iborrow ideas from it. I like the way Feng Shui incorporates defense actions for example.

I've been wanting to check Feng Shui out... that just gives me more reason, HMT.

Okay... a couple changes have been made.  First off, I'm going to include a cap for the number of points that can be rolled over from one round to the next.  Max rollover equals one full Action Pool.

Second, concerning "Interupt Actions"... I'm revising a little to allow something of this sort.  I want to make it so that characters whose initiative comes up sometime in the middle of another character's actions can act during that action, including doing interupts.

Hrm.

I'll see if I can't work that out.

I can think of a dozen games that use this very system, or something close to it. Check out Aftermath! for one that's particularly complex. The Rolemaster Companions had, IIRC, a total of four different systems that do something like this, some more complex than others.

There are some standard issues with such a system. For example, when can a player interrupt (like S mentions above, is there a countdown - how is it recorded)? What's the result of an interrupt? If you hit me in the middle of my action, do I have to start over? Starting when? What about "defensive actions"? Do you allow such things, and when do their effects end - when you start your next action, or when you complete your next action. If I'm making an attack, can I make some sort of defensive maneuver at the time? Can I abort actions to start new ones if the situation changes?

A real common problem is that really fast characters don't have their attacks spaced out in rounds, but get most up front. For example, if you have a character with an initiative of 52, and another with 20, the first guy is going to get in three attacks in the round before the other guy gets one. Then they'll exchange back and forth. Shouldn't these be spaced out evenly (See the Hero System Speed Chart for a standard and really problematic way to handle this).

What about such a system is important for your game? If you could give us the specs for what you need, we could point you towards other ideas.

Mike