Why doesn't this work?

You can easily do everything you want.

var mouseIsDown:Boolean = false;

stage.addEventListener(MouseEvent.MOUSE_DOWN, md);

stage.addEventListener(MouseEvent.MOUSE_UP, mu);

addEventListener(Event.ENTER_FRAME, update);

function md(e:MouseEvent):void

{

     mouseIsDown = true;

}

function mu(e:MouseEvent):void

{

     mouseIsDown = false;

}

function update(e:Event):void

{

     if(mouseIsDown){

          trace("mouse is down");

     }

}

The mouse down and up events are single occurrence events, not enduring ones.  The events trigger on the action of pressing the mouse down or release, not the duration of that status after the event occurs.

You can create what you want yourself without much effort at all. Set up your own Booleans up that get set and reset by the mousedown/up event handling code.

I would not want the function you show processing at all as putting that while statement in place is not going to win you anything other than a likely crashing of Flash.