Did you try unplugging and plugging it back in while the machine is On. This sometimes cures usb mouse woes.
To see if the problem is software or machanical, start up from the Install cd, and see if you the mouse or button works. If they don't you seem to have a hardware problem. If they do you're probably just as well off reinatalling using Archive and Install in order to keep all your old stuff.
If the problem happend after you downloaded an OSX update, the update is probably at fault and you can go back to your original system.
Apple had a bunch of ibooks that had some motherboard problems, but your problem does not seem to match the problems on Apple's site. They have extended the warranty on these. If you do ahve a hardware problem, you might check Apples site and see if the listed serial numbers match yours. If so, you could try calling Apple and see about it, or take the thing to an Apple store, if convenient.