@ralphb: the proximity sensor on iphone is located near the earphone slot just above the screen. It detects nearby objects (1-5cm from the screen?) and afaik it's ONLY used to detect if the user is holding up the phone to their ear\face. If they are, then the screen (and touchscreen) is immediately turned off to avoid unintentional input from your face and saves power.

I believe it's used similarly here (I saw some sensor 'holes' around the N900's earphone opening, one of them could be it).