Yes, it is the drag-cursor. The difference is that when I actually do a drag (I just tried it), the text cursor (vertical line) follows the mouse cursor around. When the problem I described happens, it does not. Also, as you said, the drag and drop is cancelled when you hit the ESC key, but when the problem described occurs, it does not. So, I am pretty sure the problem is not with the mouse.
It is annoying because this last time, I had to end up restarting my computer to get it to clear. I couldn't even get to a terminal window to kill the process.