Paypal iphone scam. What do I do?

Somebody has used my paypal account to pay for an iphone, and a dispute was opened and found in the seller's favour.

neither the initial payment, nor opening of the dispute had anything to do with me. All I know is that I'm £500 down.

what do I do?

Report it to the police - it's theft from you.

The 'seller' must know where the phone was sent or at least contact info for whoever collected it.

There's something odd as most sellers will only send to the address linked to the paypal account, to avoid problems with fraud…

I agree - file a police report
Also CALL Paypal after you have filed the police report to inform them you have filed a theft report and send them a copy. Also tell Paypal nothing was delivered to you and their investigation should show that there was no proof of delivery to your address - UNLESS this was a neighbour or family member who used your address and signed for it when you were at work, for example