This problem started after I tried to run Chrome OS from a USB on unsupported hardware = kernel panic.
Solution was easy! Pressed Fn+F1 to ENABLE the trackpad - for some reason it turned off with the keyboard after kernel panic.
To fix the keyboard (which also froze with caps lock on after kernel panic) I refreshed CMOS (or just normal memory perhaps?) by taking out battery and holding down power button for 30 seconds. Keyboard worked on next boot.