I guess it's your lucky day, because I'm going to give you the solution!
I had exactly the same problem and had been searching and trying different approaches until I've found this post (post #15) in the french ubuntu forum. I don't really understand french but the instructions were straight forward and easy to understand, so I'm going to detail them here below
As bogan said, and he was right, the only way to make the nvidia 173 drivers to work is by downgrading the xorg-xserver, so this is what we're going to do
Create /etc/apt/sources.list.d/oneiric.list and add the oneiric repo
(You can copy/paste the text of the following entirely on a terminal
You will need also to perform a "pinning" so the xserver-xorg will be chosen and kept to be the older version and not the latest.
sudo cat >/etc/apt/sources.list.d/oneiric.list <<EOF
deb http://archive.ubuntu.com/ubuntu oneiric main
deb-src http://archive.ubuntu.com/ubuntu oneiric main
Create a new file in /etc/apt/preferences.d/
cat > /etc/apt/preferences.d/xorg-xerver-pin-1050 <<EOF
Package: xorg xserver-xorg*
Pin: release a=oneiric
This will warn you it's going to downgrade a lot of "xorg" related packages, that's exactly what we need
sudo apt-get update & sudo apt-get dist-upgrade
The next step in the post says to do
which I did but didn't really help me, so I opted for trying to use the official latest nvidia driver which I downloaded from here
apt-get install nvidia-173
Once downloaded, you need to stop the GUI, so get to the terminal by pressing Ctrl+Alt+F1 login with your user and stop the xserver with
Go to the place where you saved it (most probably in your home downloads folder)
sudo service lightdm stop
and run the following
Follow the onscreen instructions, mostly "yes" to all and once it finishes reboot the computer.
sudo chmod +x NVIDIA-Linux-x86-173.14.31-pkg1.run & sudo ./!$
Voila! You're now using the nvidia driver with full 3D support!
If you want to configure other settings, you can use the nvidia-settings application that you have now installed.
If you change something and want to save it, you'll have to run it as root, so you better fire it up by pressing Alt+F2 and on the command type "gksu nvidia-settings"
This worked for me, and I hope this will help many others.
It can also work for some other legacy NVIDIA cards as well, but YMMV...