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The new phone introduces a range of new features including the ability to tether the phone's internet connection to a laptop via Bluetooth or a USB, which O2 said it would support, even though users of other mobile phones with built-in modems have so far been banned from using their mobile phones tethered.
The processor in the new model is 600MHz, an increase on the iPhone 3G's 412MHz chip. The speed of the phone has improved, and memory has also increased from 128MB to 256MB.
Customers appear to think the upgrade is worth it, with a million buying the phone in the first three days since its launch and a further six million downloading the new operating system.
In comparison, Apple sold 6.1 million original iPhones over five quarters, and has sold around 22 million to date.
Apple's CEO Steve Jobs said: "Customers are voting and the iPhone is winning. With over 50,000 applications available from Apple's revolutionary App Store, iPhone momentum is stronger than ever."