Caution: This answer was written in 2010 and technology moves fast. For a more recent solution, see @ctrl-alt-dileep's answer below.
Depending on your needs, you may wish to try the jQuery touch plugin; you can try an example here. It works fine to drag on my iPhone, whereas jQuery UI Draggable doesn't.
Alternatively, you can try this plugin, though that might require you to actually write your own draggable function.
As a sidenote: Believe it or not, we're hearing increasing buzz about how touch devices such as the iPad and iPhone is causing problems both for websites using :hover/onmouseover functions and draggable content.
If you're interested in the underlying solution for this, it's to use three new JavaScript events; ontouchstart, ontouchmove and ontouchend. Apple actually has written an article about their use, which you can find here. A simplified example can be found here. These events are used in both of the plugins I linked to.