I have been hassling with getting the bit.ly bookmarklet on my iPod touch. The same problem is of course with the iPhone. I have found references which encourage to use the bookmark synchronization in iTunes. But there is another way:

• Follow this link;
• Follow the link in that page;
• Bookmark that page;
• Give it a convenient name;
• Save the bookmark;
• Edit the bookmark again and remove the beginning of the URL until and including ?___;
• Save the bookmark again and use the bookmarklet.

Tweetie is using the same trick. Have fun.