Initial reports and my own experience since installing the update two days ago shows it does resolve some issues that plagued the 2.0x releases, most notably: signal dropouts, poor battery life, a sluggish backup and sync process, and unstable 3G signal strength meter.

The 2.1 update also brings iPhone’s musical side into line with the just-announced new generation of iPod Nano and iPod Touch that include the “Genius playlist” – whereby a playlist can be automatically created by compiling a group of songs from your library which compliment the one currently playing.

Apple’s official 2.1 update webpage claims the update includes:

• Decrease in call set-up failures and dropped calls
• Significantly better battery life for most users
• Dramatically reduced time to backup to iTunes
• Improved email reliability, notably fetching email from POP and Exchange accounts
• Faster installation of 3rd party applications
• Fixed bugs causing hangs and crashes for users with lots of third party applications
• Improved performance in text messaging
• Faster loading and searching of contacts
• Improved accuracy of the 3G signal strength display
• Repeat alert up to two additional times for incoming text messages
• Option to wipe data after ten failed passcode attempts
• Genius playlist creation

If you are still on the old 2.0x version, I strongly recommend updating your iPhone 3G to version 2.1 – from my own observations there are significant and notable improvements to the phone’s overall performance and reliability.