Clearly, I think, describes the issue. In short, your phone needs to know where you are to serve up maps and directions and stuff. It keeps a map of all the cell towers and wifi hotspots nearby so it can do this quickly. At present it doesn’t clear out old map data but a forthcoming software update will limit it to only keeping maps of places you’ve been in the last week. (via)

Update: Interview with Steve Jobs, Phil Schiller, and Scott Forstall at All Things Digital: Q&A: Jobs and Apple Execs on Tracking Down the Facts About iPhones and Location

Apple Q&A on Location Data