I've been looking into this, but haven't got very far yet. Here's the thread:
http://hackint0sh.org/forum/showthread.php?t=6885
The iPhone's microprocessor in theory has the ability to act as a USB Host as long as Apple didn't have it disabled. I don't think they did. It already has some of the necessary frameworks to support USB use, so I don't think it's that much of a stretch if the hardware can be made to work. Currently there are 3 impediments to getting exactly what you're asking to work:
1. Figure out how to switch the iPhone into USB Host mode. I'm working on this, but have not had any luck so far.
2. Build working USB mass storage drivers for the iPhone as they don't currently exist. This should not be too difficult as it would probably be mostly a port from OS X.
3. Build the unix tool 'mount' to work on the iPhone. Again, this is just a port from OS X or BSD. Many other similar tools have been successfully ported, but no one seems to have tried to port mount, probably because it wouldn't be useful for anything at the moment.
Once the USB drive is mounted, it would be simple using existing tools to symlink the drive's contents wherever you want it so that the iPhone would see it as if it's part of the main file system. Not sure if iTunes would recognize the size increase, though, but I'm sure someone could find ways around that.
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