This is a known issue with the iphone. Here is what I've been told works (and it's been tested).
setup your account, make sure your settings are correct for your server (I assume for smtp that password is fine).
>>Try resetting the device first, (hold the top button and middle button together until it shuts off and an apple logo should appear. Delete the old email and create a new one on the device. Make sure the server, domain, username and password are all correct (sometimes it may be case sensitive).
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