Does slippage occur on MtGox when 'Market Order' is unchecked?
No, slippage also occurs because the price can move adversely between your decision to sell and your order's execution on the market. Typically in financial markets the other participants can see a large order and move their limit orders accordingly.

What you're talking about is called "sweeping". This is simply the fact that there are not enough orders at the best price to match a sufficiently large order. If you have a market order you will then end up filling the next price, which will be worse.