I am a fan of ambient music and recently came across an application called Bloom.
This now ranks as my favourite application on the iPhone (or Touch). I am thinking of how I might save my creations so that I can replay them. This is not currently an option.
Bloom works by assigning a sound for each touch of the screen and plays these sounds repeatedly at with the timing of your key press. This is overlayed on top of a soothing background track.
Bloom was co developed with Brian Eno who is a major ambient music author.
UPDATE: Bloom also allows you to enter cords by using two or more finger touches together. The sounds end up being very sophisticated.