This worked for my brother's iPhone 3G...
...many people also said use a different usb port than the one you've been trying it with, just to eliminate factors. His also did not lose the info, as he had backed it up and had contacts in his outlook...
I had this problem - if you tried a different cable and usb port and still have this error try this.
Step 1. close out itunes and disconnect your phone
Step 2. turn your phone completely off
Step 3. relaunch itunes
Step 4. plug in the usb end into your computer, but do not connect your iphone yet
Step 5: This is the somewhat tricky part....hold down the round circle home button while you plug in your iphone, then, after 10 seconds, release the power button but continue to hold the home button until the phone returns to the "apple screen" and begins to restore.
This is suppose to bypass any software currently on the phone that is corrupt and do a true fresh install. Of course you probably already know that all information will be lost from your phone - so hopefully you backed up before the crash.