Using iPhone as modem - battery damage
So - looking over http://www.apple.com/batteries/maximizing-performance/ you should see that charging warms the device and your measured temperatures risk the device shutting itself off and permanent damage to the battery.

Yes, the battery is replaceable, but there's risk and cost there. I would tether over bluetooth or WiFi and disconnect the USB so that the unit doesn't have added heat load from the charging circuitry and chemistry (lithium batteries give off heat when charging) to keep the operating temperature of the iPhone to a level that's within Apple's recommendations.

Removing case or other external cooling might help a bit - but you can weigh the cost of an eventual battery replacement with the cost of a different tethering option and make your best choice.