I am also experiencing this problem. My iPhone 3G was shipped with v2.2.1 which meant that I couldn't install any
useful apps. The wireless worked and I was able to connect to my home router.
Connecting to iTunes, the v3.1 update was applied...but the phone stopped working. I just had the "emergency calls only" start up page and iTunes was telling me that the phone wasn't going to work.
I restored the phone, but it restored it to v3.1?!? While the phone worked, the Wi-fi and Bluetooth settings were greyed out, as shown here:
http://elliottback.com/wp/iphone-no-wifi-problem/
The iPhone tech support for my carrier (Optus) told me that this is a known problem that can happen with this phone and that once it is greyed out, there is something wrong with the hardware and nothing can be done beyond returning the phone (- I assume the firmware is broken and you can downgrade to the older version.)
Looks like you can't even select OS v3.1 from the drop-down menu on this forum, so hopefully this is just a teething problem.
Very annoyed as this is only Day 2 with an iPhone. Totally not worth the hassle and will never get one again.
Ryan