While I don't have the iPhone I do have the iPod Touch. And I do find the feature annoying at certain time especially when typing in other languages. BUT I noticed with the iPod that while I am typing and I see the Dictionary Auto prediction if I hit the small "x" on the right top corner on a couple of words in a row that feature turns off.
The only way I was able to turn it back on in going back to the Keyboard settings and resetting the Dictionary feature and then it comes back again.
I just stumbled on it by luck, not sure if it'd would work for the iPhone but they are basically one in the same OS so it should, give it a shot and let me know.
Cheers
Mina