I am using my new iPhone 4 and my old 3G (with iOS4) without any issues with my '08 X5.
Try restarting your phone...if the issue persists, test your phone with an iPhone docking station. You could also try disabling your phone's bluetooth. Sometimes in my car, the iPhone automatically switches the music playback to bluetooth (A2DP) instead of dock connector (iPOD kit) and then the playback stops. I then open the iPhone music player and change the playback device to Dock connecter and it resolves the issue.