Doing stuff like rotation or fading in IE7/8 is always likely to have unwanted side effects because it's going beyond the standard capabilities of the browser. In every other browser it's dead easy, but for old IE your jQuery plugin is going to be doing some pretty hacky stuff to make it work. That hacky stuff may work in some cases, but tends to be very brittle and easily broken.
IE's rotation mechanism is very clunky. The described problem of the image being moved up 200 pixels sounds like the rotation centre point may be incorrect. This is something I've encountered a lot when trying to work with rotation in IE. I would have expected your jQuery plugin to deal with that transparently, but if it's getting it wrong then I'm not sure how you'd correct it without bypassing the plugin entirely or using a different image for IE that is 200 pixels taller or something like that.
Re the black border, this may possibly be an issue with handling the alpha channel on the PNG image. You may want to confirm this by using a GIF image instead (although it won't look as good).
But overall, my main recommendation is to avoid doing this kind of thing in old IE entirely. It's just got too many issues to make it worth the effort.
Looking at your jsFiddle example, it seems like you're doing this in order to draw and animate a speedometer-type gauge.
May I suggest an alternative approach which does away with the need to mess around with rotating DOM elements entirely.
There is a Javascript library called Raphael, which draws vector graphics. It works in all browsers, including old IE versions. It is very easy to draw a good looking speedo gauge using Raphael. In fact, I provided a 4-line JS script in another answer here on SO to do exactly that. See here: Drawing a half gauge/speedometer (JavaScript Canvas or Java Swing Example needed). You could take that script, modify it to use your existing gauge background image, and bingo, a working speedo gauge in all browsers, without any of the bugs involved in trying to make IE do things is isn't designed for.
Hope that helps.