If you have no diagonal movement AT ALL, that is odd. On halo 3 using an mx518 @1600 dpi a deadzone between 34-42 in size and using a circular deadzone in addition to other settings.
One thing I did notice though, your XY ratio HAS to be set correctly otherwise your stuck going horizontally or just vertically (that's what happened to me but I was tweeking the file)
Unfortunately, in Halo 3 - the diagonal movement can be minimized, but it will always be present. I learned to get used to it and when I track people I track them horizontally then move vertically to get my sights on them. You CAN go diagonally, but you have to be so perfect in doing it as to not get any jerky movement it's better to adapt to what works.
I know it's not perfect, I am having a hard balance between "smooth" and "translation exponent" and the deadzone size in combination with the sensitivity to get the best "feel". I know when a shotty snipers game shows up I get dozens of headshots and medals for it. At medium to long range, give me a BR or snipes and you die 95% of the time, however if in close quarters I have a harder time trying to track the person - this is where the secondary sensitivity comes into play. Secondary sensitivity is handy, and I normally double or triple the amount as shown on the primary sensitivity and you really have to get used to it.
Ahh, I know I did not directly answer your question but let me get back to it.
What mouse are you using
what keyboard are you using
Using a laptop
If yes to laptop, are the mouse, keyboard and the XIM hardware on seperate ports? I had issues with my mouse not doing what it needed as I had a hub. After doing a shuffle of devices I figured the Keyboard (a merc zboard) will NOT work unless plugged into the laptop itself wont work on a hub. The XIM will work in a hub with a mouse in the mix. I have also heard of the opposite - so you may want to shift around different USB ports etc to see if that resolves any issues.
Doesn't make sense - but it works dunno why either.