FOUND FIX FOR 2007
I found the exact same problem in Word 2007. Same issue - not able to drag/drop text. In fact, the "no" symbol (circle with slash through it) appears as soon as I try to drag.
However, in Word 2007 there is no 'Detect and Repair' in the help menu. There is a check and fix option somewhere in office, but seems no good.
Found a solution that worked for me he
http://www.solvedl.com/p/10420189
"It could indicate minor corruption of the data key in the registry - delete or rename the Data key HKEY_CURRENT_USER\Software\Microsoft\Office\12.0\W ord\Data with Word closed. Then restart Word and check your Word Options settings."
In fact I did not delete the key, just renamed it. Instant fix!