I can confirm that this problem exists in iOS 4.3.5 (tested on iPhone 4 and iPad 2). We found that the YouTube embed method no longer works in UIWebView. Usually the video plays, but you only hear the sound.
Returning to the old version of Flash built into YouTube will solve this problem, however it is really slower. But at least it works.
In the application I'm working on, we get JSON-encoded data from a web server. We just made this data include the embed code for YouTube, which we can change in the iframe at any time. Thus, we do not need to constantly update our application every time Apple breaks some functions, instead we just update our JSON script, which takes only a second. Hopefully you can implement some workaround like this, or maybe just go with the old embed code until Apple or YouTube get the error.
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