The Question
How can I unpair the trackpad as a mouse and pair it using trackpad option instead?
Background
I made the mistake of pairing the Magic trackpad via System->Bluetooth->Bluetooth Setup Assistant. By doing this the only thing I can use the trackpad for is pointing an left clicking. I now see that it can be paired via the System->Trackpad->Set Up Bluetooth Trackpad… option.
What I have tried
Inside Bluetooth settings: Disconnected the device, then using the -
button removed it. Then powered down the trackpad and restarted the pairing process by holding the power button.
While the green led is flashing, I go to the Trackpad set up and find the device. However it keeps failing when connecting to the trackpad. I did notice that it fails immediately after seeing the "Connected" message displayed on my screen. At this point I can use the trackpad as a pointing device, but am unable to connect to it using the trackpad set up.
System Settings
OS X Lion
Using USB Overdrive (for a wired logitech mouse)
UPDATE
Following the advice of a comment, I used the XCode's Bluetooth Manger and reset every possible device. The issue still persists.
To find the Bluetooth Manger (assuming you have XCode installed and using Finder): Browse to MacHD/Developer/Applications/Utilities/Bluetooth
Best Answer
Turns out it was USB Overdrive. Running 3.1 still causes issues with Lion.
When Overdrive is installed it only sees the trackpad as a mouse. I uninstalled USB Overdrive and Lion detected it after reboot with no trouble at all.
This link was quite helpful as well.