Thanks for the heads up with the jQuery1.5 and jQuery UI incompatibilities. I've been looking into it for a little bit now and it seems there definitely is a problem with the two.
Widget Wrangler doesn't use any specific version of jQuery, it just relies on whatever wordpress is using. What is confusing to me is that my WordPress 3.1 dev site is using jQuery 1.4.4, not 1.5. So I'm not sure why your site breaks with an update and fixes with a downgrade.
According to the jQuery bug report which discusses the issue ( http://bugs.jquery.com/ticket/8123 ), it appears that jQuery 1.5.1 will include a fix.
The wordpress Dev team is also aware of the problem ( http://wpdevel.wordpress.com/2011/02/10/if-your-menus-or-widgets-screens-broke/ ). This article says that WordPress 3.1 is freezing jQuery at version 1.4.4, and also offers a fix in case your theme is specifically using jQ1.5 (make sure you only load jQuery 1.5 on the frontend).
I guess what I'm getting at is that it's not clear to me why you're having the problem on your site, unless you're somehow specifically loading jQuery 1.5.
For now, I would recommend loading jQ1.5 only on the frontend as presented in the article by the wordpress dev team above.
If that isn't an easy option for you, then maybe you can try a fix for the bug offered on this page: http://giuliom.wordpress.com/2011/02/08/patching-cdn-hosted-jquery/
Hopefully, the jQuery team will release 1.5.1 soon, making this a non-issue. If you find that none of these options is helpful for you, then I could probably fix it with a Widget Wrangler release, but I don't really want to add code to WW that patches such a specific bug with other software. Especially a bug that has already been fixed and is queued for release.
Sorry if this post is a bit rambling, but hopefully it helps you out. If not, let me know and I will see if there is another way I can help.