I have also experienced this problem - and I think found a solution.
If I place the select_tag before the form_for then the combobox and button work fine. If I move the select_tag inside the form then the button stops working. It now directs to update or create in the controller.
I notice in the js for the combobox it inserts "<button> </button>" into the page. If I just add that simple button code inside the form_for it has the same effect of the button directing to the controller update/create actions.
So I changed the line: (around line 38 of honking great method from the source code from
http://jqueryui.com/demos/autocomplete/#combobox)$("<button> </button>")
to read:
$("<div type='button'> </div>")
Single change and seems to have fixed the problem inside form_for and doesn't break the styles.
Seems ok in Firefox and ie in windows, and Firefox in Ubuntu.