I'm having the same problem, also using the r128 module. Changing to ati would 
not help Craig, because it just detects your card and loads r128 oder radeon ;)
I think it's a bug in the r128 module. Using software cursor rendering fixes 
the problem. But what could be the reason for this strange bug?

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mouse pointer corrupted by wine
https://bugs.launchpad.net/bugs/154566
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