FINALLY GOT IT TO WORK! I upgraded my iPhone 3GS earlier this week to the iPhone 4S and tried to pair it to the Bluetooth in my 2011 Mercedes E550 coupe. I never had any problems with the 3GS but the 4S (iOS 5.1) just kept searching and searching. The vehicle BT would locate the phone and would disply the name on the navigation screen as expected. However, like everyone else the phone just kept reading "now discoverable" and spinning. I tried removing the 3GS from the vehicle BT and then connecting the 4S and that did not work either.
What finally worked for me was when I was prompted with the PIN screen on my vehicle BT. I simply entered a PIN of 1234 and it accepted it. This triggered the phone to display the PIN screen as well. I entered the same PIN and it also accepted it and within a few seconds the pairing was completed. I have tried at least 5 times since then and it works each and every time. Phone calls and streaming music work perfectly.
Looks like the issue is the new interface has to be triggered or prompted by the BT device for it to pair. Essentially I tricked the iPhone into giving me the prompts to pair the phone to the vehicle BT properly. I hope this works for everyone!