The iPhone 3G S documentation indicates that "The icon at the bottom of the Compass screen lets you find your current location in Maps. Maps also takes advantage of the built-in compass to show which way you’re facing."
Initially I couldn't make it work as unfortunately there is no more information presented on how to make that work!
Here's the secret.
After days of frustrated trying I discovered that there are THREE icon states in the bottom left corner of the Maps Ap. These icons rotate in appearance with each successive tap on it. The default (startup icon) is "not using current location" (no highlight behind the location circle icon); followed by "Use Current Location" (the location circle icon background is highlighted); and a THIRD icon in the rotation sequence.
This icon (shown in the red circle on the Map image above right) is a circle with a "beam" image at the top. When this (third) icon is selected, the Map auto rotates to a position that "Up" is the direction the top of the iPhone is pointing.
Now as you turn around, the Map will auto-rotate to follow your orientation.