it goes down because if you're at the floor of that green bar (that fills up half the range), and then you put your hand over it, you cross the threshold and it
looks like a dramatic decrease.
what should happen, most likely with other phones, is that the range should be evenly distributed so that a drop in 1 bar is a drop in 1 bar. because iPhone 4's distribution is weighted/biased towards the top half of the spectrum, it fails when you cross the threshold. This "feature" seems like it was introduced in OS 2.1 back in '08.
You also can't avoid drops in signal when putting your hand over it -- this happens with every phone. just iphone's visual representation algorithm makes it seem far worst than it really is, and they will fix the way it displays in the next version.
EDIT: Why the downvote? Gruber even stated that the issue is the introduction of the biased bar meter. The exposure of the antenna just highlights the issue when you're at the threshold between 5 bars and "other".