Actually no, you can't. A lot of carriers, in the US at least, disable this functionality even though it's built-in to the phone. Why? So you'll buy the ringtones?
This is ridiculous that everyone is complaining about this - you pay $1.98 for a high quality ringtone. 500,000 may not be a lot in the overall catalog of music but I'm sure it's more choices than T-Mobile provides me. Further more, I pay $1.59 for a ringtone from them. I don't get to choose what section of the song it's from and I don't get a full copy of the song. I just get the ringtone and if I don't like the section they chose to make into a ringtone? That's my problem.
With the iPhone, yeah, it sucks that you have to pay but that's how cellphones work in general. Most phones don't allow you to make your own ringtones and use them. So $0.99 cents to buy a song, then $0.99 cents to make a ringtone? That's not a bad deal.
Apple has to meet their partner (AT&T) half way on this. And considering everything AT&T agreed to (namely subscription payment sharing), I'm sure Apple doesn't mind this minor concession.