Well, without my doing anything, the situation has now righted itself. I came down this morning, switched on the computer and the IPhone - and now ITunes recognises the IPhone (it is listed under "Devices", which it wasn't before)
I notice however that the IPhone doesn't get listed under "Devices" until the backup process is complete. So maybe this points to what may have been going on before? Except that the reason I was worried was because the first thing I wanted to do after dowloading the new version of ITunes is make a backup - and I couldn't because ITunes didn't "see" the phone.
Anyway, not the first time I have had the eerie feeling that my relationship with IWorld is not in my control.
I have had the issue of Windows seeing my device (touch), but iTunes not seeing it for YEARS now. Apple cannot solve the issue. I have been on the phone with Apple folks for many, many hours.
My work-around is to re-load iTunes.
Specifically, when my computer is "cold started" (every morning) iTunes cannot recognize my Touch. After re-loading, all is OK until I shut off the computer.
Wish I had never bought a Touch.