Unfortunately there is no way to prevent ALL of the echo simply because the mic will pick up some of the callerís audio that gets played through your car speakers. The only way to improve this is to increase the separation or isolation between the mic and your car speakers. Also, you could reduce the stereo volume and that will help reduce the echo.
I know what youíre going through Ė Iíve wasted many hours tinkering with this problem on my iPhone. I first tried this product (Griffin Headphone Adapter for iPhone) and I broke it open to relocate the mic to the headliner above and forward of my head. It does work but people had a difficult time hearing me unless I was speaking very loud. Note that this Griffin adaptor has a 4-contact ďtip-ring-ring-sleeveĒ plug on it . . . one is the common, one is left audio out, one is right audio out, and the one is the mic input.
I figured out that if I plugged a standard ďtip-ring-sleeveĒ (TRS) 3-contact plug into the headphone jack, the built-in iPhone mic is still active during a phone call. Further, I found that in this configuration the person on the other end of the call could hear me slightly better than using the Griffin mic when my phone is in the dock Iím using. I know this sounds odd, but itís what I experienced with my 3Gs (have not tried this on my iP4 yet).
I can further improve the mic pickup if I cup my hand around the bottom of the phone with my palm pointed of course toward my mouth (similar to cupping your hands around your ears to improve directional hearing). So at this point Iím thinking about crafting some sort of ďcupĒ or reflective surface around the bottom of the phone when it is docked.
For whatever really annoying reason, the iPhone does not route any phone-call audio through the dock connector Ė only through the headphone connector, but music can be sourced from either connector (oddly, the ringer audio will come out of both connectors). The audio output level is fixed through the dock but is variable through the headphone output. I was hoping to be able to find a dock connector that would ďdo it allĒ Ė charge the phone, handle music output, AND handle phone-call audio out and mic in. I have searched from here to Mars and Iím telliní you, it donít exist. Lots of other guys on various car forums have posed the same question. Iíve studied every dock connector pin-out that I can find on the web and it appears that Apple simply did not design that capability into the iPhone.
Probably the best option is to use the dock connector for charging and music audio out and then use the separate Bluetooth car speakerphone (they all have a built-in mic). Now, Iíve personally not wanted to do this because I know Iíll forget and leave the iPhone Bluetooth powered on all day and drain the battery faster, not to mention Iím paranoid about security with the BT left on. Maybe I should not be, but itís my own personal phobia. Further, those car BT thingies have to be charged regularly.
Anyway . . . I hope I answered your question. If youíd like to discuss this in further excruciating detail, PM me your phone number and Iíll give you a call.