I'm also getting the same error....tried with different USB ports...but the same error. Have you come across this error alk?

Edit: OK so I got it to work. I was earlier using services.app to turn on SSH, but it turns out Tunnelier didn't like the way SSH was turned on (I know it was SSH was turned on, because I could get in through wifi). So I switched off SSH through services, and used Bossprefs to switch it on..and voila! It worked on the first attempt! Now I'm online thru my unlimited GPRS connection. Even though it's a bit slow compared to broadband speeds (duh!), but it's good enough for email and general web browsing (which I anyways used to do on my iphone) while travelling, waiting at airports etc. Plus I don't use up my iphone battery and can charge it at the same time. But then I end up using my laptop battery, which lasts only for about 4 hours! Well, you win some, you lose some!

But awesome guide alk, and kudos to the entire community. SSH and tethering over USB! This is really exciting! Keep up the good work!

@teisner: Check if SSH server on your iphone is switched on properly.