According to Kevin Rose during a segment of Diggnation (video) the long-awaited copy and paste functionality will be demonstrated at tomorrow's iPhone OS 3.0 media event in Cupertino.
The revelation occurred during Diggnation #194 which was recorded live at Stubbs in Austin, Texas, during SxSW Interactive 2009. In it Rose reveals that copy and paste will be invoked by double tapping on a word, and a magnifier bubble will appear with two quotes that you can drag around your selection. Once you make your selection, you will have options to cut, copy or paste.
In the same segment Rose says that background apps and video didn't make the cut for 3.0 but that the iPhone would catch up with all the features coming in the Palm Pre.
MacRumors adds that Copy and Paste will be arriving in 3.0 alongside a much improved homepage/springboard with the ability to organize in categories.