Still trying to answer this question, and I think I finally found a solution, but it runs too slow.

var $div = $('<div>')
    .css({ 'border': '1px solid red', 'position': 'absolute', 'z-index': '65535' })
    .appendTo('body');

$('body *').live('mousemove', function(e) {
    var topElement = null;
    $('body *').each(function() {
        if(this == $div[0]) return true;
        var $elem = $(this);
        var pos = $elem.offset();
        var width = $elem.width();
        var height = $elem.height();
        if(e.pageX > pos.left && e.pageY > pos.top
            && e.pageX < (pos.left + width) && e.pageY < (pos.top + height)) {
            var zIndex = document.defaultView.getComputedStyle(this, null).getPropertyValue('z-index');
            if(zIndex == 'auto') zIndex = $elem.parents().length;
            if(topElement == null || zIndex > topElement.zIndex) {
                topElement = {
                    'node': $elem,
                    'zIndex': zIndex
                };
            }

        }
    });
    if(topElement != null ) {
        var $elem = topElement.node;
        $div.offset($elem.offset()).width($elem.width()).height($elem.height());
    }
});

It basically loops through all the elements on the page and finds the top-most element beneath the cursor.

Is there maybe some way I could use a quad-tree or something and segment the page so the loop runs faster?