If I am creating an iPhone app, is it worth trying to make sacrifices with functionality (e.g. with MPMoviePlayer) in the application and support previous versions of the OS?
Are the majority of iPhone users running iOS 4?
Will I lose out on a big portion of the market if I only support iOS 4?
If this is a brand new app, there's not much point in supporting older versions of the OS. It will require making sacrifices when programming the app, and over time everybody will eventually move to iOS 4.
There will still be a lot of iOS 3.x users because iOS 4 cannot be installed on original iPhones and older iPod touches. And iOS 4 barely works on iPhone 3G. You can still use functionality of iOS 4 while still targeting older versions though.
I've been learning through doing user testing that a lot of people don't upgrade their apps, much less their OS. Add that to the fact that lots of devices can't run 4.0, and I think you'll limit your market if you don't support at least 3.1.x.
As to 2.x, this report says it was less than 13% 5 months ago, so it's probably safe not to support for a new app at this point.
First, you're forgetting something: You need to support 3.2 if you want your app to run on the iPad.
You don't have to "sacrifice functionality"; you just have to code your app to detect what features are available at runtime and fallback gracefully.
If your app isn't free, then the real question is "Will users who don't upgrade buy my app?", and I suspect the answer is generally no. Apparently a substantial portion of the 2.x installed base are iPod Touch users who don't want to pay for the upgrade.
The other factor is the amount of work. If you use few enough iOS 4 features that it's not much work to also make it run on 3.1.3, then supporting 3.1.3 is a no-brainer. Of course, never support an OS version you can't test.