A couple of things come to mind. First, you are fat-fingering the password. Second, you have MAC address filtering running on the router and have not allowed the iPhone's MAC address in. Third, the router does not support the wireless protocol that the iPhone uses... this last one is probably not it, unless you have a really old router or have configured it only to support older protocols, like 802.11a or perhaps you are running the "N" version, but it's not the "final" version.
Check to determine if the router is supporting the b/g protocols or a real version of n. Easiest first step is to double check the password that you are entering. Next go through the router config and make sure of protocols supported and double check MAC address filtering. If everything looks OK, I suggest temporarily turning off WEP and and MAC address filtering to see if the iPhone connects and communicates using wireless. My guess is that it will. Then turn on one thing at a time, like WEP or MAC filtering and see if anything breaks the working connection.
