You can use iPhone 3G or later as a modem to connect, or tether, your computer to the Internet.
Via the carrier's cellular data or internet network only.
If you have a wireless router at home, your wireless router is not serving as a modem for your internet connection. Your wireless router is connected to a modem, with the modem providing internet access for the wireless router and wireless network, which more than one computer or device can connect to for internet access via the wireless network.
To use the iPhone as a modem via the cellular data or internet network ONLY requires a Mac running 10.5.7 or later. The modem part is using the iPhone's cellular data or internet connection as a modem for the computer.
Copied from the OP's post.
Until I synced up, and the USB tethering kicked in, and instead of downloading things via my WiFi I was downloading via my iPhone's 3G connection. Ouch!
If you have wi-fi access turn on with your iPhone and you are connected to an available wi-fi network when tethering with a computer, the iPhone's wi-fi access is not turned off or disabled. Just because it isn't turned off or disabled does not mean you are tethering the computer with the iPhone's wi-fi connection.
_Tethering works over the cellular data network;_ *you can’t share a Wi-Fi connection to the Internet.* If you have a 3G connection, you can make and receive phone calls while tethering.
I guess the information provided via Apple's User Guide is wrong.