The easiest way is to draw a filled circle on your mask using ellipse.  The center of the circle is the mouse coordinates.

I've uploaded a demo showing the basic technique to Open Processing:

I'm getting the error "mask() is not available with this renderer." which may be the source of my issues. How do I fix this issue because I cant get a mask to work for the life of me. Thanks.

I'm guessing you're not using the JAVA2D renderer, as I did in the above example (in the call to createGraphics).  

That's the strange thing. I have JAVA2D explicitly stated just like your example. I have tried P2D and OPENGL as well with no luck :(

Assuming my example works for you (you can download the project, w/ images from open processing), I'll have to assume there is some other, as yet unknown problem with your code.

has this ever been resolved?

Yes, it is annoying.
My http://bazaar.launchpad.net/~philho/+junk/Processing/view/head:/_QuickExperiments/GradientPaint/GradientPaint.pde sketch works fine in 1.5.1.
In 2.0b1, I get the error:
Exception in thread "Animation Thread" java.lang.NullPointerException
    at processing.opengl.PGL.getString(PGL.java:1029)
    at processing.opengl.PGraphicsOpenGL.getGLParameters(PGraphicsOpenGL.java:6076)
    at processing.opengl.PGraphicsOpenGL.beginDraw(PGraphicsOpenGL.java:1547)
    at GradientPaint.DrawTextured(GradientPaint.java:100)
    at GradientPaint.draw(GradientPaint.java:70)

which is a known problem of P2D / OpenGL PGraphics used with a main renderer that's not OpenGL.
That's already annoying.
If I change P2D to JAVA2D, I get the same error than you.
If I change everything to use P2D, I get a strange result, far from the original... And Java crashes!

Idem for http://bazaar.launchpad.net/~philho/+junk/Processing/view/head:/_QuickExperiments/MaskImage/MaskImage.pde
Here, surprisingly, I get an out of memory error!
Exception in thread "Animation Thread" java.lang.OutOfMemoryError: Java heap space
    at java.awt.image.DataBufferInt.<init>(DataBufferInt.java:41)
    at java.awt.image.Raster.createPackedRaster(Raster.java:458)
    at java.awt.image.DirectColorModel.createCompatibleWritableRaster(DirectColorModel.java:1015)
    at java.awt.image.BufferedImage.<init>(BufferedImage.java:321)
    at processing.core.PGraphicsJava2D$ImageCache.update(PGraphicsJava2D.java:1034)
    at processing.core.PGraphicsJava2D.imageImpl(PGraphicsJava2D.java:971)
    at processing.core.PGraphics.image(PGraphics.java:3389)
    at processing.core.PApplet.image(PApplet.java:11638)
    at MaskImage.draw(MaskImage.java:66)

(still OK in 1.5.1...)

http://bazaar.launchpad.net/~philho/+junk/Processing/view/head:/_QuickExperiments/TexturePaint2/TexturePaint2.pde
gives me a class cast exception...

That's lot of sketches broken...

I updated my GradientPaint sketch to work correctly in 2.0, by using a PImage instead of a PGraphics in P2D mode.
That's nice.
But alas, it quickly stops with an out of memory error... I tried to replace a get() with an arrayCopy of pixels, to ensure avoiding creating hidden garbage, but no dice.
Exception in thread "Animation Thread" java.lang.OutOfMemoryError: Java heap space
    at processing.core.PImage.init(PImage.java:235)
    at processing.core.PImage.<init>(PImage.java:221)
    at processing.core.PApplet.createImage(PApplet.java:1824)
    at GradientPaint.drawTextured(GradientPaint.java:98)
    at GradientPaint.draw(GradientPaint.java:68)
    at processing.core.PApplet.handleDraw(PApplet.java:2128)
    at processing.core.PGraphicsJava2D.requestDraw(PGraphicsJava2D.java:190)
    at processing.core.PApplet.run(PApplet.java:2006)
    at java.lang.Thread.run(Thread.java:662)

It runs much longer in 1.5.1 without issue...

Works correctly if I create the image only once:

1. PGraphics pgGradient;
2. PGraphics pgMask;
3. PImage masked;
4.  
5. PVector v1, v2, v3;
6. PFont font;
7.  
8. static final int D_TRIANGLE = 1;
9. static final int D_TEXT = 2;
10.  
11. int m1, m2;
12.  
13. void setup()
14. {
15.   size(800, 500);
16.  
17.   pgMask = createGraphics(width, height, JAVA2D);
18.   font = loadFont("AmericanTypewriter-24.vlw");
19.  
20.   // Make gradient
21.   pgGradient = createGradient(width / 3, height / 3, 200, #00FF00, #0088FF);
22.   // Create once the image
23.   masked = createImage(width, height, RGB);
24.  
25.   // Define a triangle
26.   v1 = new PVector(50, 50);
27.   v2 = new PVector(width - 50, 50);
28.   v3 = new PVector(width / 2, height / 2);
29.   m1 = m2 = 5;
30. }
31.  
32. final int SQR_SIZE = 16;
33.  
34. void draw()
35. {
36.   // Draw a checkered background
37.   background(230);
38.   noStroke();
39.   fill(115);
40.   for (int j = 0; j < height; j += SQR_SIZE)
41.   {
42.     int offset = ((j / SQR_SIZE) % 2) * SQR_SIZE;
43.     for (int i = 0; i < width; i+= SQR_SIZE * 2)
44.     {
45.       rect(i + offset, j, SQR_SIZE, SQR_SIZE);
46.     }
47.   }
48.  
49.   // Draw textured shapes
50.   drawTextured(D_TRIANGLE);
51.   drawTextured(D_TEXT);
52.  
53.   // Update the triangle
54.   v1.x += m1; if (v1.x > width || v1.x < 0) m1 = -m1;
55.   v2.x -= m2; if (v2.x > width || v2.x < 0) m2 = -m2;
56.   v1.y += 6*sin(v1.x/36);
57.   v2.y += 6*cos(v2.x/36);
58. }
59.  
60. // I would pass an interface and a make drawing class instead
61. // but I wanted to make it simple here
62. void drawTextured(int drawing)
63. {
64.   pgMask.beginDraw();
65.   pgMask.background(0);
66.   pgMask.fill(255);
67.   pgMask.noStroke();
68.   if (drawing == D_TRIANGLE)
69.   {
70.     pgMask.triangle(v1.x, v1.y, v2.x, v2.y, v3.x, v3.y);
71.   }
72.   else if (drawing == D_TEXT)
73.   {
74.     pgMask.textFont(font, 120);
75.     pgMask.text("Processing", 50, 2*height/3);
76.   }
77.   pgMask.endDraw();
78.  
79.   // Copy the image in pgGradient to the masked image
80.   arrayCopy(pgGradient.pixels, masked.pixels);
81.  
82.   masked.mask(pgMask);
83.  
84.   image(masked, 0, 0);
85. }
86.  
87. PGraphics createGradient(int centerX, int centerY, int radius, color startColor, color endColor)
88. {
89.   PGraphics pgGradient = createGraphics(width, height, JAVA2D);
90. //  pgGradient.beginDraw();
91.   pgGradient.loadPixels();
92.   for (int x = 0; x < width; x++)
93.   {
94.     for (int y = 0; y < height; y++)
95.     {
96.       float d = dist(x, y, centerX, centerY);
97.       color c = endColor;
98.       if (d <= radius)
99.       {
100.         c = lerpColor(startColor, endColor, d / radius);
101.       }
102.       pgGradient.pixels[x + y * width] = c;
103.     }
104.   }
105.   pgGradient.updatePixels();
106. //  pgGradient.endDraw();
107.   return pgGradient;
108. }

But successive createImage() calls shouldn't eat up memory like that... Is there a memory leak? Why we don't see that in 1.5.1?

[EDIT] Looking at the applet with JVisualVM, I see that 1.5.1 creates lot of garbage, indeed, up to 300 MB, but the garbage collector regularly kicks in and clean the memory.
In 2.0b6, the memory grows up to 700 MB in 3 seconds (!) and thus the sketch throws the OOME before the GC had the time to collect the garbage.

Processing 1.5.1. also had it's share of image related out-of-memory bugs with regard to PGraphics. If you can, please pinpoint and file an issue for this so it may be fixed in time for the final 2.0 release.

It's possible that this issue has already been reported here or here.