It was a little involved. I used a few local variables.
It is an issue of updating the "SOL" each time. "Pick all" would do this. You can try disabling it and disabling or enabling the debug text that I have inserted, you should be able get a fair idea of how this works.
May be the same could be applied to the other methods if you like them.
Try this. http://dl.dropbox.com/u/28195143/c2_share/TargetShip_InvisibleSprite.capx
Things to note: Sprite3 is very small, I am blowing it up to 300x300 so the edges would be fuzzy, you may want to use a better one to get a better overlap.
Local variable "closestTargetDist" should be greater than the invisbile sprite radius to begin with.