There's a good chance the partitioning software is running in DOS mode, and doesn't have support for a USB mouse there. If you have a PS/2 mouse lying around, that should work.
However, it's much easier to have the Windows installer partition the disk, rather than trying to do it manually with FDISK (FDISK can't maintain your data anyway, so you might as well reinstall at the same time). There's a point fairly early in the installation where it will ask you which drive/partition you want to install on -- you can also create *new* partitions at this point (although it will wipe out anything on your hard drive). If the disk already has a main boot partition taking up the whole drive, you'll have to delete that to create new ones.
As for the second question, you may have a damaged Windows install. See if you can copy that file off a Windows CD, or download a new copy of it from Microsoft. Either that or the installer is corrupt.