Similar issue on my dv7. Mouse was working in gdm, but stopped working
once logged in.

Fixed the issue by editing the file
~/.gnome/desktop/gnome/peripherals/touchpad/%gconf.xml (as also reported
here)

You can run the following command to "fix" the issue (fixed it for me).
<pre>
$ sed -e 's/\(touchpad_enabled.*\)false/\1true/' 
~/.gnome/desktop/gnome/peripherals/touchpad/%gconf.xml
$ sudo /etc/init.d/gdm restart
</pre>

-- 
HP touchpad-disable switch damages mouse and focus capability
https://bugs.launchpad.net/bugs/546503
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