Wow! I just stumbled upon this website and your post-- and I am in shock! I have been experiencing hallucinations VERY similar to what you describe. I have been under the impression that it was just panic attacks (which is what all the doctors I've been to have written these off as).
I also wake up in the middle of the night, in complete terror (I want to scream, but can't move or make a sound, just breathing really heavily), I have also "seen"/"heard" people in my apartment, and even had the sensation that someone was sitting on my legs! (All unbelievably scary, I totally understand!)
I have been on Metformin for almost 3 years, and I have never heard of this being a side effect. I had been told that due to my abnormal hormones b/c of PCOS, that I was likely to experience emotional/psychological symptoms (like depression, anxiety). I am SO glad that I read your post, though, since perhaps what I thought were horrible panic attacks were simply a side effect of metformin!
I am very happy that I have been losing weight (following the "Eat to Live" plan) and recently cut my dosage in half , and hope to be able to stop taking metformin completely very soon!
Thank you so much for your post, it is so comforting to know that I am not the only person who has experienced this! I sincerely hope that I'll get better after stopping metformin, too!