According to the Mac OS 8 Technote, this is a file created by the Mac OS 8 Finder. I do not know exactly what it does normally or why deleting it might fix this problem. I am checking into it.
Update: John Manning writes that this file is for keeping track of Mac OS 8 tabbed windows/folders. Closing all of them should at least work-around the recurrence of this problem.
Jeff Leigh has a different view: "From our experience, OpenFolderListDF is used to keep track of which windows were open the last time the computer was shutdown/restarted."
Patrick Hackshaw claims that, when he had this watch cursor problem, it was solved by disabling Aladdin's TFI control panel.