How to turn off the Terminal's "Allow mouse reporting"?
The View > Allow Mouse Reporting menu item does not enable the terminal Mouse Reporting behavior, it merely controls whether Mouse Reporting is allowed.

This gives the user a means to temporarily bypass Mouse Reporting when it has been enabled by application programs, to interact with the terminal view for short periods of time. Also note that you can use the Fn modifier key when clicking, dragging and scrolling to temporarily bypass Mouse Reporting.

Mouse Reporting is not enabled unless application programs running within the terminal request it. Application programs normally do not enable it by default, and must be configured to do so. For example, to enable Mouse Reporting in Vim, one puts set mouse=a into ~/.vimrc.

If you do not want Mouse Reporting to be enabled, configure the appropriate application program(s) to disable it.