Assuming you have tried some of the obvious things,
and had another known-good mouse to check the iMac
with; the next steps may involve resetting PRAM or
other voodoo things to attempt to chase the ghosts
out of the machine...
If a hardware failure may have occurred in the computer,
one of the things to try, as a last resort, may be to go
and reset the Power Management Unit. If not done right
this can drain the 3.6v internal battery quickly. If the USB
port has actually "failed" the logic board component would
need to be replaced. Not sure if those are separate, anymore.
Trying another USB port for the mouse; to see if the
one in use somehow has failed. Sometimes the one
in a keyboard may act up, since there is a hub in it.
Other times, it may be a port in the machine; or
the end of the wire near the USB plug. I've seen a
few older (otherwise nice) Apple Pro mice go bad
due to the wire internally breaking near the mouse
and nobody could tell it by looking at the wire.
Some of the older black Apple Pro mice are maybe
worth the effort to fix the broken wires; there had
been some take-down and repair pages for mice
and keyboards, some of them are time consuming.
Good luck & happy computing!
Here's Apple doc.#107247. Apple says to restart your Mac as many times as it takes to allow drag and drop again. This problem is limited to some Jaguar users. It may take numerous restarts.
It is also suggested, in another Apple doc. I saw, you install the 10.2.8 Combo update. You can install right over your present 10.2.8 with no issues. Make sure you unplug all USB and FireWire before installing. Just to be safe, Repair Permissions before and after the install.
If that doesn't work try the following submitted by George Orville;
Drag & Drop not working...
You have a choice files to delete in ..... ~/LibraryPreferences
• com.apple.dock.plist (your choice to delete this or not)
• com.apple.LaunchServices. plist
• com.apple.LauchServices. UserCache.csstore
Also you have a choice of files to delete in........
Then restart your Mac and try!