Just upgraded to Lion, drag and drop not working

I finally got around to upgrading to Lion today and am experiencing the most bizarre problem. When I click and hold to drag something (can be anything I'm trying to move - an icon to a folder, arranging icons on the desktop, even moving mail items to folders) the item "sticks" to the cursor. Esentially, when I click on the item and start moving the mouse a shadow attaches to the cursor and the original stays in place. Releasing the button does not drop the item, the shadow follows the cursor around. Some random mouse clicking and hitting esc will eventually unstick the shadow and it returns to the original.

At first I thought it might be a problem because I use a Kensington Expert Mouse trackpoint, so I unhitched all USB attachments and rebooted to just the Mac and built-in trackpad. Same behavior. Thought it might be my use of Path Finder so killed that, same problem (and it happens in apps like Mail as well anyway). Did some research here and found a post where someone had a slightly different issue and recommended going into settings and checking

Universal Access -> Mouse and Trackpad -> Trackpad options -> Dragging. I did this and all was fine!

Until the next reboot - and I'm back to the same behavior. Dragging was still checked. I've tried a number of times rebooting with that setting on and off, no luck. This is a serious problem, drag & drop is integral to computing!

Paul