The problem was bad js library files in javascript directory. I had 4 js libraries in the javascripts directory .. prototype, dragdrop, effects and control.js - i didn't need them but they were there since rails 2.3 days and i never bothered to get rid of them.
I removed them and everything works.
There are two possibilities -- one is that there is a "conflicting" function name in the libraries with jquery .. or there is a missing syntax error; I think it's the latter.
When files are served individually as in the development mode, a bad file doesn't affect anything unless the script gets used. However when sprockets combines them into a single application.js file .. then you could get into this kind of problem.
Assets precompile doesn't give a warning/error-message for such conflicts or issues and that's a bummer.