Reading around on the internet and here this is not a rare problem, but many people dont seem to be having it, so our iPhones are either defective, or need some kind of software jumpstart. I've been playing with mine all day and just can't get anything to come out of the line out at all.
There is something about plugging a non-iPhone known device for playback and it is supposed to offer to turn off the phone to stop you hearing the rf noise through the speakers (while I could not hear any audio, I COULD hear the noise of it through my car stereo) so perhaps this mechanism is just confused and not letting anything happen. I dont know, but I think that if nobody has sorted it out by monday I will be making a call to apple support about it. It's definitely not working right, and it's not just with 3rd party hardware, but with it's own dock. So it's not the other stuff that is all broken, it's the phone.