Given that it was a fairly safe bet the new phone would have a higher-res, 960x640 was a fairly obvious candidate for the resolution. Anything else would have made resulted in a noticeable drop in quality when running existing apps.
Because 960x640 is exactly 2x the existing iPhone resolution in each dimension existing apps and their artwork can be doubled. Since the screen is approx the same size (unlike the iPad) this results in an image that's entirely indistinguishable from previous models, and may even be better if things like font and path rendering are "aware" of the higher res.
If they had chosen any other resolution then existing apps would need filtering when rendered fullscreen which in many cases would almost certainly resulted in a worse, or at least oddly different, look than the original. I'm sure Apple would have preferred not to go with 960x640 for cost reasons, but they couldn't very well release a phone where 160,000 apps look worse than when running on the previous model.
960x640 was a fairly obvious candidate for the resolution
A candidate perhaps, but not at all obvious. It's a higher pixel density than any device Wikipedia knows about: http://en.wikipedia.org/wiki/List_of_displays_by_pixel_densi.... Other alternatives that would have been at least as plausible would be to keep it the same ("only geeks care about meaningless specs like that") or go to 720x480, where 1.5x scaling wouldn't be that bad.
