I discovered that it is possible to type email, text messages, and enter text in most western languages. Simply tap and hold the button for the letter that most closely resembles the one you'd like to type. While holding the key down, an additional menu will appear where you can select the desired letter or accent.
For instance, to get an é, simply tap and hold E and select desired letter with accent from pop-up menu.
[robg adds: This feature was added with the iPhone 1.1.1 update, but as of now, it's not yet documented in the iPhone's user manual (which hasn't been updated for 1.1.1), nor anywhere that I can find on the iPhone support pages or even in the what's new video.]
Mac OS X Hints
http://hints.macworld.com/article.php?story=20071017110028128