A new app from the company I work at: Guitar. For less money than a set of strings you get a professional music app with the highest quality acoustic guitar samples you'll find. There's over 1,500 pre-defined chords, a dozen pre-configured songs and an intuitive interface that makes it simple to put together your own chords, songs and playlists. Most importantly, and unlike similar apps, it's really easy (and fun!) to actually play music with Guitar. Additional details on the FAQ page.

They are selling it for four bucks (introductory price on the App Store. Works with iPhone and iPod Touch.

UPDATE: here's a great youtube video showing someone playing Hotel California with Guitar