iPhone surely have much more compared to iPod. Screen is way better even though both claimed to have Retina Display.
When I look at my iPod Touch 4g again after tinkering a few weeks with iPhone, it was like .. Hmm my iPod does really this bad? Less contrast, black level is terrible. Slow and laggy compared to 4S (yeah of course). But I dont have a chance to compare with iPhone 4. My phone even have smooth and better home button. On paper, iPhone and iPod Touch may share some similar spec, but in reality they dont even come close. That explains the price difference.
And like Intell posted, it has gps, cellular radio, better build quality, compass and many other tidbits. For things it can do, iPhone is quite worth at retail unlocked price ($649-849) although still, $100 increments is too high for merely additional capacity.
But if you paid like > $1000 for unlocked iPhone, I'd be pissed off too, it's not really worth that much. But maybe that's what you get in your country, huh?