I read about this issue yesterday, but can't quickly find the link. Basically, the iPhone has moved a bunch of stuff to this "Other" location because of a problem it had. The only way to recover the lost storage is to sync up your iPhone with your computer, then do a Restore of the iPhone. That will wipe your storage and the next sync will bring your data back from your computer's backup.
I'm sorry I can't remember the details, but it's not a new issue. As I recall, following the Restore to its factory state and then re-syncing returned the iPhone to its correct state, with the "Other" stuff gone and everything else was perfect.
I was playing with an iPhone last night that had been reset and re-synched, and the only changes I noticed were that the AirPort passwords had to be re-entered. The restored iPhone remembered the networks to automatically join, but the passwords were missing. I asked the owner if any other settings had to be redone, and he said yes, but that all his personal data was restored.