I suspected that this maybe caused by Gnome/gtk configuration that was messed during upgrade to Squeeze. Tried to install LXDE and still no dice, same issue observed. I was guessing then that this might be an xorg driver issue (vboxvideo) or mouse (vboxmouse). I started making adjustments to my xorg.conf and waalaah.... issue fixed.
This is a snippet of the original configuration:
Changed it to: