For some unknown reason the cursor on my iMac suddenly started disappearing randomly recently and I don't have even a theory of what changed to cause this frustrating problem (My MacBook Pro running the same software doesn't have the problem). It appears that this has been a long standing Mac problem for some people but Internet searches have not identified anyone who knows the cause or what to do about it. A workaround for me until a cause and solution is found is to use Omnigroup's free Omnidazzle cursor utility (http://www.omnigroup.com/applications/omnidazzle/ (http://www.omnigroup.com/applications/omnidazzle/)). Whenever I need to find the cursor I just use the ctrl-` key combination to enable cursor highlighting. The option I use is the bullseye highlighter. You still can't see the cursor some times but you know it is in the center of the bullseye which you can show by toggling with the key combination. Perhaps not an elegant workaround but it sure is saving me a lot of time and frustration in being able to use my cursor.
You don't say what kind of mouse you have, but if it is wireless try changing the batteries.
Glen, if it helps, I've experienced this same problem and have used a similar workaround.
I'm on a MacBook Pro (early 2009, OS X 10.6.2), not an iMac, so I don't think it's hardware, but rather a software conflict of some kind. I don't normally use a mouse, but I do have the latest Logitech Control Center (http://www.logitech.com/index.cfm/494/3129&hub=1&cl=us,en) driver installed to use a Logitech bluetooth V470 (http://www.logitech.com/index.cfm/mice_pointers/mice/devices/3287&cl=us,en), and it's certainly possible i've only experienced it when using an external mouse, but I'm not 100% certain. If it's the same problem I've seen, it's not that the cursor doesn't move (a potential battery problem indication), but rather that the cursor is not visible at all. Enabling cursor-highlight software renders the cursor visible, and then the mouse does drive it, suggesting the battery is fine.
You could try removing all 3rd-party mouse drivers -- at the expense of losing some external mouse button functionality. If it happens very regularly, you could try booting OS X with extensions off, in Safe Mode (http://support.apple.com/kb/HT1564) to confirm that it no longer happens, and hence that it is indeed a software conflict. In my case it occurs too rarely for me to prove it goes away when you Safe Boot. I'm only seeing it a few times a month.
Glen, are you using an Apple mouse or a third-party mouse? Does the behaviour go away if you change mice? Is the mouse directly connected to a USB port, through the keyboard, or via a USB hub? Try changing these and let us know if the behaviour "sticks".
One unlikely suspect...
Logitech! If I'm not mistaken, Logitech Control Centre(LCC) makes use of a feature in OS X that is, in most cases, off limits. I'm speaking of the "ApplicationEnhancer.bundle"(APE) from Unsanity that LCC places in the /System/Library/SystemConfiguration directory. As Ben says, if the problem disappears in "safe boot" mode, this is an indication you have a some kind of "haxie" installed that is affecting your mouse's behaviour.
It may have been installed without your knowing it - by LCC for example - or by some other obscure, but legitimate software - Epson's fingerprint reader for example also uses APE. APE was okay until 10.6, though badly mangled even in 10.5. It seems the developer has "abandoned" (yes, I mean abandoned!) the software that people used widely to "theme" their Macs, as well as allowing some very non-Mac peripherals to function - my Logitech Wingman joystick for example.
I digress - I doubt this is your problem, try the things I mentioned in the first para and get back to us!
Happy Mac'ing!