It looks better if we override the cursorAt:
$("#foo").mousedown(function (e) {
var x = e.pageX - this.offsetLeft;
var y = e.pageY - this.offsetTop;
console.log(x);
$("#foo").draggable("option", "cursorAt", {left: x, top:y});
});
Updated fiddle: http://jsfiddle.net/johnkoer/Ja4dY/8/