The new iPhone application is available for free and gives you basic instant messaging capability with a few nice extras. Of course, you can see who is online and chat with your friends. You can also share photos, or view an archive of recent conversations.
Yahoo! Messenger for iPhone also has a special idle state, so if you answer a phone call you will continue to receive IMs. As long as you return to Yahoo! Messenger within 10 minutes, you can pick up your conversations right where you left off. It's not quite running in the background, but it's a nice extra until Apple provides the long promised push notifications sometime this summer.
It's interesting that Yahoo! now has three applications available for the iPhone that all give you the ability to send and receive IMs on the Yahoo! Messenger network: this app, OneConnect and Yahoo! Mobile. They all have a slightly different flavor, but it seems that Yahoo! needs to sort out their iPhone strategy.
Note that unlike it's desktop siblings, Yahoo! Messenger for iPhone will let not you chat with your Windows Live Messenger (formerlly MSN) contacts. For that, you need a multi-network program like BeeJive, IM+ or Palringo. But if you primarily use Yahoo! Messenger and don't need to connect to other IM networks, this app should suit you well.
Thanks to our forum member Youngistaan for the tip!