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Dropping via the "E" key works, I actually never tried to drop anything using the mouse.

I can't get pressing E to do anything. Or more correctly, I can't get it to do anything with the wand. I can pick up other items and use them, throw them. It's like I grow an invisible robotic arm that's got a visible vibrator wand attached but can't do anything aside from turn the power settings up and down or turn it off.

In your case I'd also try renaming the user folder as described above to see if it's some setting problem.