Draft n
Being a draft N router, that model is not supported by the iphone or more to the point, the iphone doesn't work on draft n. There may be a work around. In your router configuration (through the browser interface), trying setting your antenna to broadcast in g only. Should be under a tab labled SETUP->Wireless Settings...I suspect your broadcasting in N. If that doesn't work, then you may be s.o.l.
On the other hand, if you can connect with encryption off, my next feeling is one of your router based encryption settings is set wrong. Go into those and make sure that you are using the correct key length/type/standard, etc. I'm nearly positive your issue is router settings based.