Computer's internet stops working if iPhone 4 is plugged in with Wi-Fi on?

For some reason my internet stops working if I plug my iPhone 4 into my computer with the Wi-Fi on. If I disable the Wi-Fi it works again. Any idea why this is happening?

Added (1). Any idea how to change it so it works?

Your machine is obviously trying to use the phone as a dialup modem for connection. This totally disrupts your routing.