The problem turned out to be a new feature of Windows 8.1 that improves high DPI screen support. In doing so, they changed the way the mouse input is handled. Looks like this is interfering with a lot of games which do not support raw mouse input and looks like MWO is also one of them.
What I did was to follow the directions in this article. After installing this windows update, open up your Registry Editor by Windows Key+R combo and typing in "regedit". After that, go to this entry:
HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows NT\CurrentVersion\AppCompatFlags\Layers
If "Layers" doesn't exist, create it yourself by right clicking AppCompatFlags and choosing "New>Key". After that right click Layers key you created and choose "New>String Value". Now, you must enter the game .exe file path and press enter.
After that, double click on the String you created and enter "NoDTToDITMouseBatch" as value. Mine looks like this:

Voila, the mouse lag is gone and MWO feels smooth again.
PS: Devs, can you enable raw mouse input to solve this issue?
Edited by Tahribator, 29 July 2014 - 03:00 AM.