If you need a phone, then iPhone. If you don't need a phone, then consider iPod Touch vs PSP instead. In that case it depends on what types of games you want to play. The iPod is great for cheap mini games that you can play in spurts and not have to devote a lot of time into, and it's now starting to get bigger games like Secret of Mana, Zenonia, Chaos Rings, Chinatown Wars, Plants vs Zombies, Raven Sword, etc. It's mostly just a bunch of cheap minigames at the moment, but the library will likely mature in the future and have a larger variety of games and much longer ones at that. It'll become more like a handheld gaming-wise. At least that's what I believe.
The PSP has a lot of console-style games like Little Big Planet, Metal Gear series, Final Fantasy, Star Ocean, etc., much more so I believe than the iPod Touch. It does have cheap mini games, too, the PSP Minis. They're about the same or similar price as iPod Touch games and offer about the same amount of gameplay. However, the PSP Minis library doesn't compare in number or variety of games as the app store.
So you'll be choosing from a large library of mini games + growing library of deeper games vs large library of deeper games + growing library of mini games. Do you want to start off small or get your feet wet on the first shot? Many PSP Minis are iPhone/iPod Touch ports anyway, like Hero of Sparta, so you'll be able to play some of the same games no matter what device you choose.
Also, if you do decide to get an iPod Touch, wait until the end of September because a new generation of iPod Touch is usually announced in September.
Well, good luck deciding. I think you'll win either way.
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