I'm seeing almost the same behavior in an 8.04.4 guest on a 10.04 host.

The mouse pointer movement in the guest was ABYSMALLY slow until I
edited /etc/X11/xorg.conf to use 'mouse' instead of 'vmmouse'. After
doing that and restarting X, mouse performance inside the guest matched
that of the host. I lost the ability to seamlessly transition between
the virt-manager window and the host, but this is a minor convenience.
Having the mouse pointer move in conjunction with my physical mouse is a
necessity.

I did not notice the high CPU usage that others are reporting in this
bug.

-- 
[lucid kvm-qemu]High cpu usage when moving mouse
https://bugs.launchpad.net/bugs/553081
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which is subscribed to xserver-xorg-input-vmmouse in ubuntu.

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