Before I got my Sony Reader (not a Christmas present btw

) I'd read a number of novels on my HTC desire (3.7" screen). As a web developer spending lots of time on code, I tended to read off-white text on a black background. Worked for me. I read about 10-20 books that way before deciding on a proper ereader.
Only thing I would say is, regardless of screen size on a smartphone, don't bother unless you like scrolling a lot, or are comfortable with tiny text sizes.