iphone wont connect to wifi

You say the IP address is OK, but does it start with 169.x? The subnet mask has to be complete, 255.255.255.0, your router IP has to be there - 192.168.x.x is typical, and your DNS server iP addresses have to be there.
If anyone of those is missing or your IP address starts with 169.x, you will not connect to the internet.
Try the following:
1. Reboot the router (unplug the power cord)
2. Reset the phone network settings - tap Settings > General > Reset > Reset Network Settings
Other common problems that cause your router to fail to issue an IP address properly are the use of WEP encryption or outdated router firmware.
If you still have problems, tell us what kind of router and encryption you are using.
iMAC 20", iMAC 21.5" Mac OS X (10.6.7) iPhone4 iOS 4.2.6, 2G touch iOS 4.2