I figured out how to make Pandora work. Basically, you need to get your iPod to finish playing songs (not paused) and then Pandora works -- at least it did for my iPhone 3GS with OS 4.2.1.
I did this by creating a Playlist called "Pandora", and I only put one mp3 track in that Playlist which is 2 seconds of silence (I created that track with music editing software). I go to that playlist and play that track. When it's done playing (all of 2 seconds), I can go to Pandora and hit play and it does not revert back to the iPod.
Hope this helps!
Edit: The LR4 will always loop the playlist in repeat mode (even if I explicitly turned off repeat mode on the iPhone). However, the above workaround still works because there will be a short gap in between playings of the 2 second "song". It appears that because the song is short, there is a good chance that when you hit the "Play" button on your Pandora, it will be during the short duration between the songs, and Pandora will continue to play without reverting back to the iPod. If it doesn't work the first time, just hit the "Play" on Pandora a few more times. It'll usually work within about 3 tries.