The problem with the challenge system is that it would be used cynically.
For example:
Say Villa have a corner in the dying minutes and the score at 1-1. Villa throw everyone up front in an effort to get a winner. The ball, however is cleared and the opposition have a break, 3 on 1. O'Neill thows a challenge flag, citing that a player was fouled during the corner and the ref halts the game to check the replay, costing the opposition their chance to score.
The only way round this (thatI can see) would either be:
(i) That you can only challenge when the ball is out of play (in which case, in the above scenario, the ref might have to 'chalk a goal off' if the break was successful but there did turn out to be a minor foul)
(ii) Only allow the ref to halt the game for a challenge in certain situations (say the last 2 minutes like the nfl) but then this will mean that the ref would be under pressure to review everything in case he dismisses a genuine discrepancy.