In Nat Torkington’s Four Short Links on O’Reilly Radar, he links to Orbot, an Android application that allows users to proxy any or all of their network traffic through the privacy enhancing network. (Tor, or The Onion Router, works by establishing a network of relay nodes hops through which add layers of encryption, like an onion.) Reading the details, Orbot is a comparable bundle of software to what has been available on desktop OSes. It includes Tor itself, libevent and privoxy.
If I recall correctly, previously it was possible to run a browser that integrates with Tor on Android, but now Orbot makes it easier to use Tor with any application. The project page has clear instructions, made a lot simpler if your device is rooted. There are also screen shots showing the application running, the capabilities look very comparable to Vidalia, the bundle I use on OS X.
Tor is typically quite slow due to the small number of relay nodes and the overhead of the encrypting and decrypting of traffic. I would imagine that the lighter data utilization for some aspects of a smart phone may be better matched with the speed penalty Tor imposes.
The top use, the one for which Tor was originally intended, is circumventing censorship. Being able to access that same protection from a smart phone will undoubtedly by invaluable to journalists and activists in situations where getting to a computer isn’t feasible or possible.