iJisho - Japanese->English and English->Japanese dictionary and learning tool for the iPhone and iPod Touch including sample sentences and daily reading practice.
Search "iJisho" at the App Store to install.
*** 19th August 2008 iJisho v2.1 - free upgrade ***
Version 2.1 brings a major addition to iJisho:
Daily updated news and articles in both Japanese and English can now be downloaded to your device and viewed offline within iJisho.
Plus an iPhone first: "Copy and Paste".
Simply touch any underlined word in the daily articles, and have it automatically looked up in the dictionary!
Perfect for learning the meaning and reading of Kanji and bookmarking words of interest.
***
Daily article list - Selecting a word in a Japanese Article - Press GO to be taken to the definition!
How to use the dictionary:
Japanese to English: The Japanese to English dictionary is automatically initiated when the search word is written in Japanese. Therefore, to use the Japanese->English dictionary, Japanese words need to be inputted using the Japanese keyboard, which is included with all iPhones and iPod touch devices. In order to activate the Japanese keyboard:
from the home screen go Settings->General->Keyboard->International Keyboards->Japanese.
If you would like to input using Romaji, select the QWERTY keyboard. The inputted Romaji will automatically be converted to Hiragana, from which you can search the Japanese dictionary. Otherwise, select Kana to input using a "Hiragana keyboard".
All Japanese entries which come up in your search will also have a Hiragana translation.
Handwriting Recognition: The handwriting recognition touch pad can be used to input Kanji into iJisho. To activate the handwriting pad, go:Settings->General->Keyboard->International Keyboards->Chinese (Traditional)->Handwriting.
English to Japanese:
If the search word is not Japanese (i.e. not Hiragana, Katakana or Kanji), the dictionary will automatically switch to English -> Japanese mode.
NOTE: the entries in the English->Japanese dictionary are in normal Japanese (not in Romaji or plain Hiragana). Because of this, the English->Japanese dictionary may be of limited use to those who cannot read Kanji etc.

English->Japanese and Japanese->English Dictionary
Kanji Handwriting input and example sentence search