How to use alphabets on keypad in Phone App? - Samsung Galaxy 3 I5801
As far as I can tell, you can't : press the 7, and it will show ( on my Galaxy S ) the first phone number with a 7 , next to that field is a downwards arrow.

Pressing that arrow will display a popup selection, with at the top the same number already selected ( the first with a 7 ), and underneath the first contact starting with a P - scrolling down shows all contact up to and including contacts with an S.

But if you want a contact, why not use the Contacts tab, you can search there and to the right of my screen is the complete alphabet. Pressing one of these letters, will jump to the first contact name starting with that letter.