I stand corrected. There is indeed a mouse for PS1. I was wrong and you were right about that. It was even available as a launch accessory.
I did some research, and here is what I found:
The Digital/Analog Mouse T0 and Digital/Analog Mouse T1 do what I said before: they turn mouse movement into simulated stick movement. The faster you move the mouse, the further over the virtual stick is pushed.
The Digital/Mouse setting looks like it's supposed to support the PS1's mouse mode, but it appears not to work. I have a game that supports mouse (Die Hard Trilogy), and tried the Digital/Mouse setting with it two different ways: Digital/Mouse setting on Pad 1, and on Pad 2. In neither case did moving the mouse or clicking (before and after switching modes using F6 and F5 as appropriate) have any effect. The game ignored mouse input.
So, in regards to ePSXe, it looks like the support for a virtual PS1 mouse is broken.
Using the Digital/Analog Mouse settings would make sense, if (a) the game supported the analog sticks, (b) the stick you needed was the left-hand one, and (c) you could program mouse clicks into the pad config so they'd correspond to X, O, triangle, square, etc. Since (c) doesn't work it makes C&C in emulation problematic.
Your best options are to use the default controls, or use a different emulator and that new mouse plugin, or get C&C for PC. If you decide on the latter I can point you to instructions on how to get it to run under XP (I've successfully done it).
I wouldn't recommend buying a PS1 mouse and trying to plug it into a PSX->USB adapter - the drivers for the adapter are very unlikely to support it, and even if they did it's doubtful any emulator would.