I have neither device, so I'm not directly answering your question, but I was in the same position agonizing over getting an iTouch or an iPhone for several months, with the possibility of giving up physical books for ebooks as a factor, though the quality of internet access (both reading and writing) was my main concern. I was looking for an alternative to the sub-2" screen on my SE W580i phone, which caused noticeable eyestrain.
The solution I found was "none of the above;" I ended up with the MSI Wind U100, a netbook. While it can't serve me as an on-the-go MP3 player, neither could the iPhone or iTouch, due to the exorbitant cost of the larger-storage models, which are still too small. As a reader, I'm finding it superb. So long as I adjust brightness to my lighting conditions, I get zero eyestrain from the display, even reading in the dark in bed. The one con is the weight--at 3lbs, it's perfectly comfortable to prop on my chest in bed or cradle in my lap on the train or in an armchair, but you're not going to hold it up in front of your face for very long unless you're a bodybuilder or a Sherpa. If you have any interest in comic books, it also works great with CDisplay.
Anyway, you might consider a netbook. For me, it met the cost-to-utility ratio where none of the "i" products could (and a dedicated reader definitely could not). You have a lot of options these days in the $275-$400 price bracket. What sold me on the Wind were the price ($300) and good reviews of the keyboard. For battery life, the eeePCs are much better, but I plug in at home and at work and never run out of juice between. The only times I run down the battery are reading on the porch, which is pretty easily remedied by getting up and doing something while it charges back up
