Ok here comes the full grim reality as I can tell.
The mouse is a microsoft intellimouse explort for bluetooth (model 1001)
This has been rock solid until the 10.7.2 upgrade.
Symptoms:
with the mac freshly booted, an attempt to use the mouse results in the following.
1: a "Pairing Request from: Microsoft Mouse" occurs. Clicking "yes" does nothing, the dialogue box remains, and no activity is discernable. The mouse does not cause the cursor to move.
2: while this occurs, the bluetooth icon on the menubar changes to incle the three dots, and the "Microsoft Mouse" entry in the dropdown there is emboldened, with an option to disconnect.
3: if the bluetooth pane of the system properties is open, the "Microsoft Mouse" entry in the devices changes its stutus to "Connected" with the details panel showing:
Paired: No
Configured: Yes
Favorite: No
Connected: Yes
Wait for the paring attempt to timeout:
Delete the Microsoft Mouse from the devices.
Wiggle the mouse.
The Mouse re-appears in the device list without me adding it (nice, but still isn't working).
Delete the Microsoft Mouse from the devices.
Click the "+" and go throught the "Bluetooth Setup Assistant"
Hit the "makebreak connection" button on the base of the mouse.
The mouse will be discovered
It will also be added into the device list again!?!?
Select the mouse, click continue
Get a dialouge claiming the mouse is already paired (well it's back in the device list already)
Click OK
I now have a working mouse. Oh deep, deep, joy.
Wait for the mouse to idle and disconnect, and yes this will take about five minutes, and the bluetooth mouse disconnected white oval thingy will appear as expected.
Wiggle the mouse again, and rather than the expected white bluetooth mouse connected oval thingy, you get the dialogue requesting a pairing back at you.