If you need an 3G capabilities then go with the iPhone. However, the iPod Touch is more powerful than the iPhone 4 in all areas. So if you don't need a phone or already have a cheap one, I would go with the iPod Touch.
The iPhone 4 only has an A4 processor in it while the iPod Touch has an A5 (The new Touch will perform similar to the iPhone 4S). Unless you need a data plan and a GPS, I would go with the new Touch rather then the iPhone 4.
Well, I have decided that question in favour of the iPod Touch 5, since I'm not using mobile 3G/4G internet and GPS much. Where I live there's usually a free WiFi Hotspot around, and the cost of my occasional paid Hotspot use doesn't warrant the monthly charges of an iPhone contract.
I'm eagerly awaiting my iPod Touch 5 (32GB black, ordered 15 September), so I can put my iPhone 4 up for sale.