In the first version of the iPhone, keyboard input is limited to ASCII English. For a workaround to allow additional languages and characters in simple emails, point the iPhone browser at this site. The javascript virtual keyboards available there cover French, German, Italian, Spanish, Russian, Czech, Greek, Brazilian, and Swedish.
Just enter your text via the onscreen keyboard, then click the E-mail button.
Mac OS X Hints
http://hints.macworld.com/article.php?story=20070712165527861