I was about to buy Flash Builder, but the support is TERRIBLE!!!!
I hate to have to agree. And Adobe's rolling over and playing dead in front of Apple is loser's move. They should ditch their president.
Yes AIR 2.6 is compatible with iOS 4.2.1.I'd recommend you update to the latest version of FB and AIR. You should download the free upgrade to Flash Builder 4.6 and build from there. It's much improved and AIR 3.x has better performance all around.
Regarding the incompatibility issue, you're absolutely sure you have an iPhone 3GS and not the 3G? They look nearly identical. One sure way to tell is to plug it into iTunes and see if you can upgrade the OS to the latest iOS 5.x. If you can't upgrade to iOS 5, then it's for sure a 3G and is not compatible with AIR 2.6+