I think, iPhone is not among the devices supported by Adobe Photoshop Album Starter Edition 3.2. To avoid coming across the fatal error everytime you connect your iPhone, you can disable the Adobe Photo Downloader. For that, right click on the APD icon in the system tray (it must be resembling a small camera) and select disable.
I have a similar problem with my new iphone 4, but I never had the problem with my previous iphone 3g.
Your post seems promising. However, you say ''right click on the APD icon in the system tray (it must be resembling a small camera) and select disable''. Unfortunatlely I don't know where to find '' the system tray''. Control Panel has a system folder but I can't find any access to an icon resembling a camera. Also, I am used to using Adobe Photoshop downloader. Since it worked with my previous iphone, can't it be made to work with the iphone 4?
The system tray is located in the lower right hand corner of the screen. You may need to click the small arrow to expand the tray to see all items.
I don't know of any system incompatibilities between the photo downloader and the iPhone 4, but since the Starter Edition app has been discontinued, the only supported form of the photo downloader comes with Bridge or Photoshop Elements.