On a self hosted WordPress installation (not a wordpress.com or .org) I was being continually rebuffed by an incorrect username/password combination – and I knew my password was correct.
Was it a problem with the iPhone application itself, or was my blog mis-configured?
The solution as it turns out was reasonably simple:
From your WordPress installation admin control panel: under Settings -> Writing in the Remote Publishing section ensure there is a tick in the checkbox
XML-RPC – Enable the WordPress, Movable Type, MetaWeblog and Blogger XML-RPC publishing protocols.
After that, you should be able to add the site from the iPhone app. Good luck!