The UK iPhone prices are very much inline with those in the US now, if not cheaper, with the 8GB iPhone 3G being free compared to $99 on its nearest match contract. I also think the 3G is here to stay for the majority of the next 12 months.
I cannot see the UK prices dropping anytime soon. The 3G S is never going to sell as well as the 3G did, simply because of the contract issues with the bulk of potential customers being tied into contracts already. O2 know this, and Apple know it so it will already be priced accordingly. Only poor sales will force O2 to drop the price, but Carphone Warehouse are reporting heavy interest already, plus the only negatives so far are around upgrades, and tethering not the cost to new customers.
Ofcom may have something to say about tethering if the complaints don't die down though.