Bluetooth tethering no longer working - iPhone 3GS (iOS4.1) and Macbook Pro

Hi all,
I don't understand why this is not working anymore. In the past I had successfully paired & used a bluetooth tethered connection between my Macbook Pro (OSX 10.6.4) & my iPhone 3GS (pre 4.1). The network connection was working and I was able to surf the web/use MSN etc. This is not a feature I have used in quite some time and for some reason now it is not working. I have done several upgrades on my phone since I last used it, currently on iOS 4.1.
Lets pretend I am starting from scratch and my Macbook & iPhone do not know each other, devices have been forgotten on both.
- iPhone & Macbook both are on & discoverable
- On Macbook Pro I select "Set Up Bluetooth Device"
- Macbook scans and detects my iPhone, I select "Continue"
- Macbook connects with iPhone & displays 6 digit pin, also pairing notification is shown on iPhone with the same 6 digit pin
- I select "Continue" on Macbook & "Pair" on iPhone
- Connection is made, iPhone is now listed on Macbook and vice versa
- From bluetooth menu (on Macbook) in the iPhone device menu I select "Connect to Network". Error is displayed on Macbook "The bluetooth network is unavailable. There was a problem connecting to your device..." & on my iPhone an error "Connection Unsuccessful. Make sure iPhone is turned on and in range".
- When I try to connect from the iPhone an error is displayed "Connection Unsuccessful. iPhone is not supported" with a button to Forget Device.
What... the ****?
This has worked in the past without a hitch. Has something changed between say iOS 3.x and 4.1 that might cause this to no longer work for me.
Any protips are greatly appreciated!

Don't feel like a noob, my settings changed after the last update without warning and I was having the same issue as you until I found your post that alerted me to the fact that my internet tethering might be off!
So for others out there that are having this issue to turn tethering on go to Settings > General > Network > Internet Tethering > On
Thank you!! I had already wasted over an hour repeatedly syncing and unsyncing my darn bluetooth connection.

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