What mipmapping actually does is pick from a series of different possible textures depending on the distance of the object. (There are usually several different textures, ranging from a couple pixels up to maybe a 128x128 pixel texture.) As an object moves farther away, the size of the object to which the texture is to be applied may become smaller than the texture. In this case, a lower detail (smaller) texture is selected. This process is repeated over and over. A texture (like the terrain) can appear to flash or flicker if a texture that is not properly scaled is used, in which case the video card will have trouble deciding how exactly to map the texture to the object. (It specifically can't decide which pixels to select from the texture as it scales forward or back.) This can be visible as a shimmering or flicker.
It could also cause blurry gauges, because a lower detail texture is being scaled up, instead of just using a higher detail texture. This is may be intentional as it would improve performance. I don't know this for a fact, but I would assume the level of detail slider simply selects what the highest detail texture to be used is. Setting it to "more performance" may limit the use of higher detail textures to save video memory.
