If new iphone harsware is released later this year as expected, I intend to upgrade. My question is this, I would like to give my old 3g phone to my daughter to use as an ipod only for music and games etc. Is this possible?
yes but you need to jailbreak it.
No need to jailbreak. You can leave the old sim in as well (although when restarting your iPhone it will try to activate, no prob, just dismiss)
You can load all your apps on it as well without buying them again as long as you sync with the same computer.
@mbdobbs: You should delete your email address. Otherwise you might get spambots sending you crap.
Once you have the phone activated, just sign into your iTunes account, plug in your iPhone, click on the iPhone icon on the left, pick your syncing options in the middle pane, and sync.