The iPhone 4 has three antennas. These are slots, or spatial discontinuities in the metal band around the phone. It's been known for a long time that empty spaces in a conductor (aka, “slots”) can radiate RF signals and receive them just the same as the more traditional metallic antenna elements.

However – if you cover up a slot antenna with an electrical conductor and/or a lossy dielectric material, the radiated RF will be either reflected back to the transmitter (if covered by a good conductor) or absorbed by the covering material (if the material is “lossy” or absorbent in the RF sense).

The human body is both electrically conductive (full of ionic liquids, or electrolytes) and RF-lossy (called a high loss tangent, which is part of what makes microwaves able to heat stuff). So when you put your hand over the slot antennas of your iPhone 4, you absorb outgoing transmitted RF and you block incoming RF signals.

And this is consistent with the observation reported by many that a case helps alleviate the problem. Most cases are nonconductive and are non-lossy, or RF-transparent. So they create a small gap between the slot antenna and your hand through which outgoing and incoming RF signals can pass.

This is pretty basic, simple stuff for RF design engineers. Anybody who designs phones for a living w/should have spotted this.