Re: Stepper motor wires size, possible step loss?
Dropping Z is VERY common on underpowered systems. Add a spring, weight over a pulley, long bungee cord, etc... to counteract the effect of gravity on the Z axis.
If that problem happens only after the machine has been running for a while, check motor heat. Stepper motors CAN lose strength when they get hot enough (as in hot enough to burn) and a simple CPU cooler with some thermal paste can make a world of difference.
If the CAT5 isn't getting warm, it's probably not an issue for the motion, but the cable moving with the motor WILL be an issue. CAT5 isn't designed to move repeatedly, so I fully support your decision to replace it. Extension cords are a fine low cost source of good wire. Use two per motor, and just ground the ground wire... it helps to reduce electrical noise.
If none of that helps, buy better drivers.
As to the repeatable error... isn't that about half the diameter of your cutting bit?
James hosts the single best wiki page about steppers for CNC hobbyists on the net:
http://www.piclist.com/techref/io/steppers.htm Disagree? Tell him what's missing! ,o)