IMAC 24" cursor moves, can't click

My iMAC 24" (Late 2007) just started randonly freezing up. I can move the bluetooth mouse pointer, but can not click on anything.  Keyboard doesn't work either.  Only way out is to hold power button down and shut off/restart.
I was able to locate the Apple Hardware Test that came with machine and it passed the extended hardware test.
Verified/repaired disk.  All software updates completed.
Any advice would be helpful.

There is a bug in the latest update (10.8) causing loss of interactivity.
The mouse still moves around the screen but nothing is clickable.
Only way is to key yr way to the apple menu, and select the sleep  option. Wake it up again then log in. Works well...
until it freezes again.

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