Android - Encrypt the phone's internal storage

Android 3 (Honeycomb) offers full system encryption natively. However, as it's only for tablets at this point I will post some other avenues.

There was some work done on this for the G1 using LUKS and Cryptsetup. I think I've seen this on a moto droid rom too, but you'll definitely need root. It is not trivial to do, and there isn't too much interest so popular roms like Cyanogenmod don't provide for this natively.

There are some apps in the market that support encrypted file stores (check out Lock Files). I have no idea how transparent that is on the system however.

To your italicized point on remote wipe. There are MANY solutions for this. If you're using Exchange you can push this with ActiveSync, if not apps like Lookout, and more provide remote wipe and other functions. There are even manual ways w/ dyndns and a listening SSH server.

Hope I was some help.

Inside this question linked by GAThrawn, there is a link found by noname:

ANDROID - Encryption

Motorola claims it will offer "file system level encryption for both internal device memory as well as SD card", in early 2011. This encryption seems to be exactly what I was asking for (more details in the link).

All that's left is to hope that Motorola lives up to its promise.

This is a very old question with no up-to-date answer. As of 2014, Android 4.x and later offer native full-disk encryption.

Here's how to encrypt your phone along with pros and cons, and here's a discussion on the benefits of doing so against various types of attackers.

Android N offers file-level encryption.