Not sure if this helps but I've been having a similar clickwheel problem. Mine does not function at all. I'm about to recheck again all ZIF connectors for misalignment and after reading some posts here particularly oldturkey's.
I suspect he is " on the money" in looking at the hold switch. It may not be the switch itself but perhaps a ribbon cable leading from it.
If anyone has replaced their battery in the course of their repair or mod they could have easily damaged or simply unseated the square shaped earth or ground that is just glued to the back casing and also given help by the battery being glued to the backcase. Puttingextra pressure on that small square tab. The ground or earth tab lays under the stock OEM Battery and is pressed into position or held in place by the battery.
Because in my own mod which included an iflash quad and a new stonking great big battery which no longer aids in pressuring that ground/earth tab. After the clues given by mainly oldturkey but others too I found that ground tab was not adhered as well as it could be to the back case. So I supect that could be at least part of the cause.
I'm about to recheck all those connectors and the clickwheel earth/ground itself. If it works and I'm triumphant I'll let you know...if it's a red herring I'll quietly hide with my tail between my legs.
Oh I thought about using scotch instead of vodka as that's what is at hand...didn't because I feared all the ipod might be good for after that was Bagpipe Music!
Cheers,Andy