Make sure "Use Joystick" is unchecked in the in the Configuration menu (it's under the Input tab). When it's checked, the player always attacks in the direction they are facing (which is ideal for joypad controls).

Note to self: Maybe we need to separate the facing option from the joystick option? Or maybe there's some better way to let the player know what's happening. nobody_special666 isn't the first person to get stuck this way, and it's definitely non-obvious what's happening.

Got the same problem

Is it worth putting in a big old warning under the joystick option, "Warning: checking this box will break mouse combat aiming"?  Or "Disable if using mouse controls, or combat aiming issues may occur"?

I actually think that it can be a separate option called Mouse Aiming or Cursor Aiming. On by default; if you disable it, powers are aimed the way the hero is facing. This also opens up possibilities for input devices that are unusual e.g. surely there's a handheld device with analog stick AND stylus touch-screen.

I had the same issue, unchecking 'Joystick' fixed it. I was planning on using a Wiiremote + Nunchuck to play the game but due to the crazy amount of buttons, didn't and left it enabled. Combat was extremely dificult with it enabled, but once makrohn told me to disable it, it was easy to use.

Personally, I would rather have the attack follow the character's direction, not the mouse direction, as it would allow for a full wiimote setup (or xbox 360 gamepad).