I did most of my development with PowerPC, and it did work. However, it was painfully slow compared to using a MacBook Pro, and I don't think I could have gotten the code physically on the device without upgrading to Intel.
Once I hit the roadblock of not being able to get my code on the device, I upgraded to a new MacBook Pro, and I'm really happy with it. Development of my game would have been much faster if I'd started with a MacBook instead of going PowerPC. I had a high-end PowerPC machine and even it was about 1/4 or less the speed of the MacBook Pro. An iBook would be significantly worse.
I think you can develop for iPhone on any Intel machine, but I highly recommend the dual core or multiprocessor machines. In other words, get a Core Duo, not a Core Solo. If you're really pushed for money you might consider a Mac Mini Core Duo machine, which you can sometimes get refurbished for US$499. Check Apple's refurbished section periodically for deals, since they are always changing.
Because you will eventually have to get an Intel system I just don't think it's cost-effective to start on PowerPC unless you actually own PowerPC hardware now. In any event, switch to Intel as soon as possible thereafter; it was a great boon to my productivity to have the much faster machine.
Hope that helps.
D
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