Registered purely to say that I am having the exact same problem.
Can't fast travel because mouse1 exits the map, TAB does nothing, keyboard does not work while picking locks, favourites menu does not work because mouse1 exits it.
I replaced my modified prefs.ini file with the backup I had, no change. Tried using the 4GB launcher and launching from steam, no change. Deactivated the few mods I had installed, no change.
Currently looking for a way to roll back to 1.1, and cursing to myself.
**EDIT**
Okay, I think I managed to fix it.
Make sure you are not using any mods (smithing ones seem to cause bugs in this update)
1. Delete the Skyrim - Interface.bsa file in the Data folder.
2. Go to Steam, right click Skyrim, then go to Properties>Local Files>Verify Integrity of Game Cache.
3. It will verify for a bit and then say that there are 2 or 3 files missing, and that they will be replaced.
After that, the mouse1 problem was totally fixed for me, though you will have to redo your settings (like subtitles and unticking the xbox controller box)
Arrow keys do not work, but I'm pretty sure that's just the patch being fail.