Thanks for the answers,
I managed to fix by pulling in a version of the driver from a newer kernel.
Now, I have touch screen fully probed. But for some reason, in Android, it seems that only top half of the touch panel reacts properly.
I have added simple touchscreen .idc file for the panel which got rid of the 'acting like a mouse with cursor' symptoms.
It seems when I run 'adb shell getevent -lt /dev/input/event0'
The touches in top left and bottom right are correct values for the resolution of the screen. (240x320)
What could be causing this?
Thanks,