I've heard informally that warnings get issued when your application hits about 22 MB. (Any allocated memory is included -- the iPhone keeps everything in physical RAM and doesn't page out to any other storage.) Given that the phone only has 128 MB of total RAM, this seems plausible.
That limit does not include the memory used by shared system libraries, such as the Objective-C runtime. And while I'm not entirely sure on this, I don't think WebKit's memory usage is included for the UIWebView component, as I believe WebKit is always loaded (but again, not 100% sure on that).
The best thing to do when you hit this limit is free anything that you can easily regenerate or re-read from input files, such as views, images, and cached data.