I use my iPhone 4 for some console games, but mostly for casual. Where is that button thingy we alway needed without jailbreaking.
The 3gs is considerably more powerful than the PSP. The problem (from a developer standpoint here) is that to make an "AAA" console PSP quality game you need a really large investment of time and manpower to see a high quality game. A lot of people mistake this for device capability when its really up to whoever decides to invest x into y. As of yet I haven't seen any AAA developer invest more than penuts into the iPhone market. Presumably because PSP and DS return so much more money for them. It's also still worth their while making it playable for 3g. Not sure what they were thinking with Avatar though, that runs so bad it isn't even funny.