Apparently this is not really a bug, but is actually a "feature" of Synaptics 
Touchpad.
Its meant to prevent the mouse from accidentally being moved while typing.
Luckily this annoying behavior can be turned off in Gnome by going:

System > Preferences > Mouse > Touchpad > (Uncheck:  "Disable touchpad
while typing.")

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mouse freezes while key pressed after karmic upgrade
https://bugs.launchpad.net/bugs/467992
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