OK booted from an Ubuntu 11 CD and the problem remains so looks like I can't blame the Windows drivers, looks like a BIOS problem.
Trackpoint works fine if it alone is enabled in BIOS but not if enable together with the touchpad.
This is with both 1.34 & 1.35 BIOS, anywhere I can download old BIOS version from to try ?
It sounds to me like you may have a hardware issue needing warranty repair. If it is still within the exchange period from where you bought it, maybe you could get it swapped out.
I tried it on the W520 at my work and it all works as it is supposed to do. I think it said BIOS version was 1.27. I don't think reverting to an old BIOS is going to fix it. If Lenovo diabled this trackpoint functionality with a new BIOS, I am sure that we would see a ton more posts from angry users about it on the boards.