I've tried the alt iso for kubuntu 7.10. Same cursor problems. I even downloaded the kubuntu updated parallels image (similar to a virtual appliance) from the parallels site. Same cursor lockup problem again.
I conclude my parallels installation must be defective. Maybe the error was downloading the install from the Ubuntu commercial partner repository first, finding that it didn't work, then removing it (with apt-get remove) then downloading and installing the .deb from package from the parallels site. Perhaps the remove was not fully completed or ...???
I've spent many hours on this. Virtual Box and VMWare Server definitely work better with fewer problems.