IPhone 3 vs 4 - What are the major differences?

I have an iPhone 2 right now and am looking for a newer model. I have 2 issues now: 1) my iOS is 3.1.3 (phone is unlocked) and I literally can't get any new app on my phone and 2) my wi-fi is going in and out. With an iPhone 3, will I be able to download/install most latest apps?

You should get the newest iphone that your budget can stretch to because the newer device will get supported with software updates for longer. And the iphone 4 and upwards has the retina display which is loads better than the older models.