The YouTube terms of service prohibits users from downloading videos from the website. This was a primary reason behind Apple banning the free iPhone app MiTube not so long ago. Now if you are still looking for an alternative, here is an app that will enable the process for you. The YourTube app is available on Cydia for jailbroken users and provides a way to download HD YouTube videos to the iPhone, iPod Touch and iPad. Besides this, the application also lets you import these downloaded videos to your iPod app.
Of course, since this is a jailbreak app, non-jailbroken iPhone users cannot access the application. You can of course use one of our jailbreaking guides to get started (unless you have not updated to the latest OS). But do remember that jailbreaking can void your warranty.
The latest update of YourTube is compatible with iPhone 4 and iOS 4 as well and is available at a price of $5. Already own this iPhone app? Then you are eligible for an upgrade at just $1 if you had purchased the older app before July 1.