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I don't think it will happen, at least soon, for many reasons.

-A large part of handleds users are kids and teens, the iphone is too expansive for most of them.

-Most gamers won't renounce playing  traditional handled games, because iphone apps are just considered as cheap pastimes by them, just like casual games succes doesn't stop gamers from playing traditional homeconsole games

-I also think that both Nintendo and Sony will come up in time with some new competitive ideas to prevent this from happening, Nintendo for example is already considering new 3G connection services on DS's successor.

Not to mention that the iphone hasn't got buttons...