The setting in question is called 'Max Frames to Render Ahead', and it is usually hidden from the normal Nvidia Forceware Control Panel options. To enable it, I recommend using NVTweak, since NVTweak is easier to use to enable/disable this option (compared to Coolbits) and has other functionality which can come in handy. Run NVTweak and tick the 'Additional Direct3D' box, then close NVTweak. Now go into your Forceware Control Panel, and under the 'Performance & Quality Settings' item you will find a new item called 'Additional Direct3D Settings', click on it and you will see this option.
You can find out more about how to use NVTweak on this page of my Nvidia Forceware Tweak Guide. You will also find more information about the 'Max Frames to Render Ahead' option on that page, as well as other hidden options for the Forceware Control Panel. For ATI users, you can adjust the 'Flip Queue' setting which is the equivalent setting to the one above by installing and using ATI Tray Tools. The same values apply to both cards.
The amount of data produced by the GRAW engine means it can saturate your CPU and/or Video RAM with pre-rendered frames (whole screens ready to be displayed). On most systems this can result in noticeable mouse and/or keyboard lag, even when your FPS is reasonably high enough not to usually suffer from this (e.g. 25-30FPS+). By reducing the maximum number of frames to render in advance, you reduce this bottlenecking effect and hence significantly reduce or remove the mouse lag.
However, here's the important part: this is not a tweak for improving FPS as such. The general recommendation to set 'Max Frames to Render Ahead' (or 'Flip Queue') from its default of 3 down to 0 will actually reduce performance on many systems, particularly Dual Core or HyperThreading CPUs. Secondly, even on single core systems, you may notice reduced performance in certain areas. So on balance I strongly recommend setting this value to 2 to start with, and if you still have mouse lag, dropping it down to 1. Remember, not all mouse lag is due to this setting: in areas where you have very low FPS (i.e. below 10-15FPS), you will get lagginess - this occurs in virtually any game where your FPS drops down to the low teens or single digits. You will have to consider changing other settings to increase overall FPS.