Can the iPhone SDK take advantage of the iPhone's proximity sensors? If so, why hasn't anyone taken advantage of them? I could picture a few decent uses.
For example, in a racing game, you could put your finger on the proximity sensor to go instead of taking up screen real-estate with your thumb. Of course though, if this was your only option, then iPod touch users wouldn't be able to use the application.
Does the proximity sensor tell how close you are, or just that something is in front of it?
Assuming you mean the sensor that shuts off the screen when you hold it to your ear, I'm pretty sure that is just an infrared sensor inside the ear speaker. If you start the phone app (you don't have to be making a call) and hold something to cast a shadow over the ear speaker, you can make the display shut off.
When you asked this question it was not accessible via the public API. You can now access the sensor's state via UIDevice's proximityState property. However, it wouldn't be that useful for games, since it is only an on/off thing, not a near/far measure. Plus, it's only available on the iPhone and not the iPod touch.