I have an iPhone 4S (Black, 32 GB, AT&T) running iOS 5.0.1, but I previously saw this issue on my jail-broken iPhone 3GS while it was running 5.0 and 4.3.3. This iPhone 4S is not jail-broken, nor has it been jail-broken in the past.
This occurs only sometimes. While I am typing and an auto-correction pops up, if I click on the auto-correction, it substitutes the text immediately instead of disabling that particular correction.
Is this a bug, or is it possible that I have a setting somewhere that causes it to act in this fashion? Is there a work-around?