This is also broken in 10.04 Server.  Reopening.

as mentioned in comment 3, see duplicate launchpad bug #1327220 and
#1327349.

see also many complaining of the same trouble in the forums:
 http://ubuntuforums.org/showthread.php?t=2228206


thanks,
Hamish

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https://bugs.launchpad.net/bugs/1327014

Title:
  Linux kernel 2.6.32-61 hangs gnome desktop on ubuntu 10.04 lucid lynx

Status in “linux” package in Ubuntu:
  Invalid

Bug description:
  Just did a regular update and the latest kernel would boot, but when logging 
into my gnome desktop the mouse
  cursor shows a sandbox and is inaccessible. Had to go back to 2.6.32-60.

  Ubuntu 2.6.32-60.122-generic 2.6.32.61+drm33.26

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