I've had two of these mice die on me. Very frustrating to move it and have it turn off, Windows throws it's little disconnected sound, then it comes back.
The problem as far as I could tell is with the cord on the mouse end. If you open the mouse up, the cord is bent around a few plastic bits, as you use it, it seems to pull and stretch this section of the cord.
It's funny, I actually tried doing the same thing as you with the switching of the PS2 to USB and back again. I was under the impression that it had fixed it for about 10 mins, then it died again
FTU - Wish I knew that 6 months ago....oh well.