IPhone 3G won't use wifi anymore.

I hope someone can help here. My wifes 3g iPhone last week stopped using wifi. After updating to 4.2 the problem still exists. Its a funny one though. The iPhone can see my wireless network. I told it to 'forget the network' and I was able to find it again and enter the WPA password and it said it had 'joined the network'. So I'm thinking that the hardware side of things is ok because its still allowing me to reconnect. I tried a factory reset with no luck. I even tried freezing it (a popular suggestion I found) to no avail.
The little wifi symbol (at the top of the iphone screen) does not appear at all, even though it shows as connected in the settings screen. One thing I did notice was that if I go to somewhere where I don't get a mobile network signal at all the wifi symbol then appears - Aha! I thought! But I then tried Safari and it said I had no internet connection. aarrghhhh!
My own iPhone 4, Macbook and Windows Laptop all see the Wifi network OK.
So to some up. The wifi seems to work on the 3G running 4.2, but doesn't - if you see what I mean.
Anyone any suggestions what the next step might be? Is this a common symptom of a physically broken wifi on an iphone 3g?

Carol_r YOU ARE A GENIUS!!!!
One of the things I tried was to reboot my wireless router, but not my adsl router (which the wireless router connects to) which also servers dhcp. So after your comment I rebooted it and wholla! All working again. Thank you SO much for steering me in the right direction!

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