A solution I found else where is to:
- Connect the iPhone to your computer, Itunes wont acknowlege the phone at this stage.
- Now put the phone in to DFU mode(see this link for an explanation of how to do it, few button clicks but it will answer any questions you might have: http://osxdaily.com/2010/06/24/iphone-dfu-mode-explained-and-how-to-enter-dfu-mo de-on-your-iphone/).
- iTunes will now recognise the iPhone in DFU mode, giving you the option to factory reset the device with the latest iOS update
This happened to me yesterday while using an iPhone 4 I purchased a year ago that was running iOS 4.1. At the time of writing the latest iOS is 5.0.1 which my phone is running fine with no further issues. Of course if you dont have your data backed up you stand to lose some stuff, but the phone will run fine and iCloud which comes with iOS 5 will prevent future data loss. Hope this saves someone some time searching the internet or a trip to their local apple shop.