Mac OS X Terminal mouse reporting
To my knowledge it is turned off by default. However, all it allows is for applications run in the Terminal to see the position of your mouse cursor. This could be useful for things like games where you use your mouse. So in most cases, it simply does not matter.

To turn off Mouse Reporting, just press Cmd-R again.

However, if you really want to reset your Terminal preferences: 


First quit the Terminal, then open the Finder.
Press Cmd-Shift-G and type ~/Library into the bar that appears
Press go.
Find the Preferences folder, then find the file called com.apple.Terminal.plist.
Drag it into the trash, then empty the trash.


Your terminal should be back to factory settings.