There has been much debate about the lack of copy and paste on the iPhone. Some people think it is a desperately lacking feature, while others believe the phone creates a new standard in UI design in which copy/paste is unnecessary. Either way, here is my idea of how copy and paste could be implemented:
Copy: Position the text cursor as you normally would, by pressing in a text field until the loupe appears and then moving your finger to the correct location. Once you have navigated to the correct location, release your finger and then immediately tap and hold. After a second, the loupe will reappear, but this time moving your finger highlights the text between the initial location and your new one. To complete the selection, remove you finger. A dialog will pop up prompting you to Copy, Search, or E-mail the selection.
Paste: To paste, navigate to the correct location using the loupe as normal. Now, release and briefly tap the screen (without holding). The software could paste the text immediately, or prompt you to either paste or cancel. The correct behavior would have to be determined by user tests, to see if spurious taps result in unwanted pastes or if the dialog box is unnecessary and cumbersome.
There is still the problem of selecting text in an area where holding your finger drags the view. Perhaps if you immediately move your finger after pressing the screen, then the view moves, but if you don't move after a short delay, the loupe appears. However, I often find myself touching the screen for a few seconds before I pan, so this would likely need some refinement.