What's broken if slider doesn't work?

I have a 3G. It powers on, but the slider to unlock the screen doesn't work. If I press the button twice, to get into iTunes, it plays songs and the pause, forward and other buttons at the top work, but not the slider. Resetting and upgrading software didn't work. The screen isn't cracked, but just below the black line where the bars, wifi symbol and battery icon is displayed is a bit of discoloration, like something beneath the glass is displaced.

What do I need to replace?