Currently Being ModeratedFeb 16, 2013 3:54 PM (in response to slagge1)
That's because App Store must first download the application, at 1.7GB. The App Store doesn't download/install on the fly, it needs to download it first. Then install it. Then remove unnecisary files. So you'll need 3.5GB of free space for this application, but after it installs you'll get about 1.7GB back.
App Store: downloads app at 1.7GB
iPhone: installs app at 1.7GB (note that the download file is still there, and the installation will consume a further 1.7GB)
iPhone: removes download info, while leaving the installed App in place