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Iphone/O2 Sim only - Settings change

Hi can anyone help?

I have an out of contract iphone 3g that has been on an O2 Simplicity £20 tariff since Dec 08 (600 mins 1000 texts and unlimited browsing as my o2 treat).

Since updating to the new iphone 4 settings last weekend I am no longer able to access the 3g internet whilst out and about. Plus I am no longer able to send picture messages.

I called O2 (Twice)and was told that I needed to change to an Iphone tariff at £25 per month. My minutes will be reduced to 300 and I will have 1gig download allowance each month. This seems totally wrong. I will get less or the same money. We hold two O2 contracts, that are both out of date so I can switch networks if necessary.
I was not given another option.

Is this legal? It seems very heavy handed of O2.

Any input would be helpful. Thanks.:(
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