external keyboard and mouse not working in closed clamshell mode

Hi - can someone help with this strange issue. Yesterday in closed clamshall everything was working fine. Today I cannot use my external keyboard and mouse. Note the external monitor does show the screen (after the blue flicker etc), but keyboard and mouse is just not detected.

Using Mac OS X (10.7.5). Tried fiddling the "mirror" settings etc in the display preferences but nothing seems to help. Really annoying....please help