"unable to download application" when installing directly on iPhone
There are a lot of variables that could be the cause here (iOS 5 would be the problem if the app required it, but Apple has a different dialog box for that.) 


Network time out (My firewall at work didn't like Apple's CDN until I manually approved  it)
Small hiccup (Has it happened multiple times? )
Hiccup on Apple's end (timeout?)


Next time it happens, I'd recommend either turning Airplane mode on and then back off and trying again (basically resetting all the network connections).  I've seen that happen before (especially with larger downloads).  The large download situation wouldn't apply here since you mentioned it did download over 3G