THERE IS A FIX!
It's called pixelpipe. It's an app store app. However I read on their twitter that they have temporarily pulled their own app because of a bug in th the thumbnail pictures.
I have pixelpipe 2.0 installed on my iPhone4 and I was able to upload high quality to YouTube. I uploaded the video 3 times. Once through the camera roll. Once from my desktop straight to YouTube. And once from pixelpipe.
I could not tell a quality difference from the desktop upload and from the pixelpipe upload over 3G
I got an error the first time I tried to upload said video from pixelpipe. Low on memory, had to reboot the phone then it worked fine. Runs in the background and everything.
Keep an eye out for it to pop back up in the app store and go check out their website. This is a pretty cool app. It will upload a video to all kinds of services.
I got it for my 3GS almost a year ago. They just updated to use the multitasking API, but it was buggy so they pulled it themselves. I think they didn't want people getting a broken version and having to wait around for the update to clear the app store approval Nazis