This would be quite hard to do in JavaScript, and even if you code it perfectly it might still fail in some cases and/or browsers. You have to keep in mind that JavaScript can't really trigger native events directly, although there are some browser-specific exceptions, see this question for more information on that topic.
UPDATE:
I would suggest that if this is something like a "how to use tutorial" you screen-record it and then play the video on the website.
If you must really do it like this, it might be easier to move the cursor from the frame following a timed sequence, and have jQuery do all the necessary events, avoiding the detection of the element at x,y coordinates.
That being said, this is how I would solve this problem:
What you can do though is to simulate most events with JavaScript + jQuery. If you wanted to simulate the click event for all elements for example, you should first create a click event handler:
// Simulate their standard behavior
// if they already had a click event handler make sure it stops propagation
// or returns false, preventDefault won't stop the browser from following
// their href now.
// Change the #iframe accordingly
$("#iframe").contents().find("a").bind('click', function(){
window.location.href = $(this).attr('href');
});
Now to ensure that the newly bound click event gets fired we must trigger it manually. According to you question you know the coordinates where the virtual mouse is, so I'll suppose they are in variables x and y.
In order to get the element below the virtual mouse you could use the JavaScript function elementFromPoint(), but as most really useful JavaScript functions, it doesn't work the same way in all browsers.
I haven't tested this yet, but there is an improved version of the function available at http://www.zehnet.de/2010/11/19/document-elementfrompoint-a-jquery-solution/, supposing it works as it should let's move on.
It's very important to call elementFromPoint on the iframe and not in the current document, otherwise it will return the iframe element (More information here)
// x,y should be the coordinates where the virtual mouse is
var elementUnder = $("#iframe").contents().get(0).elementFromPoint(x,y);
if($(elementUnder) !== null){
// Now you must decide what to do, probably depending on the element type
// and finally, if it is an anchor, trigger the click event
if($(elementUnder).is("a")) $(elementUnder).trigger('click');
}
There may be easier or more elegant solutions, although I can't really think of any. Since the page inside the iframe is on the same domain, I guess you already know all of its possible contents, making this much easier since you can prepare the code for all necessary events.
For the mouse over event you would do the same, but remember you must also trigger the mouse out event.
I have added to your jsFiddle the code above, so that you can see it working on an anchor tag: http://jsfiddle.net/XySmQ/4/
You have to keep in mind that there are many events that JavaScript or jQuery can't recreate, such as a dropdown dropping down.