xterm has escape codes which let a program handle mouse clicks. Pine uses this to great effect, and it's especially cute with a touch screen -- you can tap on menu options on the screen, tap on mails in the folder index, etc. Terminal doesn't support these escape codes.
The xterm control sequences are documented in its 'ctlseqs.txt' file -- for example, http://ftp.xfree86.org/pub/XFree86/4.2.1/doc/ctlseqs.TXT
Further debugging shows that this is actually working correctly -- it's pine at fault, because it's choosing not to use the mouse escape codes if $DISPLAY isn't set (despite the fact that $TERM is 'xterm').