<p>When prototyping initial GUI functionality with a customer is it better to use a pen/paper drawing or to mock something up using a tool and show them that ?</p>

<p>The argument against a tool generated design being that the customer can sometimes focus on the low-level specifics of the mock-up rather than taking a higher level functional view of the GUI overall.</p>

Always start with paper or paper-like mock-ups first.  You do not want to fall into a trap of giving the impression of completeness when the back-end is completely hollow.
A polished prototype or pixel-perfect example puts too much emphasis on the design.  With an obvious sketch, you have a better shot of discussing desired functionality and content rather than colors, photos, and other stylistic matters.  There will be time for that discussion later in the project.
Jeff discusses paper prototyping in his Coding Horror article
UI-First Software Development
Click the "Watch a video!" link at
twitter.com
to see an interesting take on the idea from
Common Craft
.