I have been having this problem in IE. I have two divs which I use to drag selected elements from one to another. Lets say I have a child element (also a div) in div1 and so
I had this issue in IE7 and it turned out to be that the IE7 DOM was not perfect.
In my case I had an image tag rendered by the ASP.NET MCV TagBuilder, which rendered it as:
Note the ending tag there and that was what caused the problem. It worked when rendered as:
Hope this helps.