This happened to in January my 3G phone on one of the version 3 updates. Software got halfway through updating, phone crashed and got into a reboot/crash loop.
Took it to Apple Guru desk in Bristol who tried for ages then said nothing could be done.As it was 13 months old it was out of warranty and O2 didn't want to know either. O2's phone insurance that I had didn't cover it 'as it's not broken sir'.
I had to pay £190 for a new 3gS phone upgrade.
Still the good news is if that happens to you, currently you can get a 16Gb 3GS phone for £50 upgrade cost from O2, and sell your bust phone to carphone warehouse who just want it for bits. My old 16gb 3G one got £185 on Friday.