Some of the problems I've had with mice over the years include:
-Trying to use a Laser or Optical mouse on a glass or highly reflective surface.
-Low batteries in a mouse that didnt report to me the battery was low.
-A mouse designed for Windows 95, that didnt have a good XP driver would just stop working until reboot.
So I'd suggest first: Make sure you are testing with a different mouse that works on another computer.
If its still not working, I would start to suspect some type of XP corruption (Hard disks, drivers, virii, service packs)
Let me know if any of those help and if any further direction on one of those is called for.