The same here, although on Slackware 10.2.
The stock 2.6.13 kernel from the slackware instalation 
disks was working perfectly.
The touchpad was detected as ImPS/2, and the "touch-and-drag".
was working ok.
A new compile of 2.6.16.20 broke the things.
The new kernel detected the touchpad as SynPS/2 and 
the "touch-and-drag" was not functional.
After compiling the ps2 mouse support as module
(CONFIG_MOUSE_PS2=m)  everything was ok.
I do not know why the thing was not working when 
compiled into the kernel.

-- 
No touch-and-drag with Synaptics pad
https://launchpad.net/bugs/36958

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