Much as I was expecting a 4" screen, the above article which suggests 3.7" does makes sense to be honest.
The resolution of the iPhone 4 screen wasn't spurious, they had to exactly double the resolution in each direction so they could support pixel-doubling with legacy apps rather than having to implement some nasty scaling. This means that they can't easily increase the resolution again without doubling once more which obviously isn't feasible with currect technology.
So they're stuck with 960x480 and so the reasoning behind not wanting to increase the size too much as it would reduce the PPI does make sense.
Frankly I don't think a 4" screen is necessary. Unless you watch loads of video or browse the web a lot then 3.5-3.7" is more than enough and actually easier to use with one hand (thumb) IMO.