Yes - it selects what the mouse pointer is pointing at - not what the reticule on the grid marks, only it does so through a projection plane that you are not aligned with. Use your stick selection button, rather than the mouse one.
I am happy to hear that you can, from what you say, now pan, rotate and zoom using the mouse: Previously doing that would introduce some wierd offset, that completely threw the "aim" off.
(I too find stick controls extremely clunky and slow, and would have preferred mouse.)
(EDIT: My own bindings are stick up-down/left-right to traverse the grid, twist to zoom, a rocker on the throttle for vertical traversal, and an analog stick on the throttle for pan and tilt rotation. (EDIT2: Do not use the throttle axis. :7))