I have a problem with yahoo account on iPhone too. When I set up the account, it gives me an imap authentication error. This is with only one account. With the other yahoo accounts it works fine. I put in a question to yahoo, but they were not of much help. On searching the net, it seems a lot of folks have this problem. Folks have recommended making your password alpha-numeric, others have just setup a new account.
Seems my co-worker is in the same boat as you. She has another Yahoo account that seems to connect just fine. They are all updated to the latest Yahoo settings and nothing seems different. I have not been able to find a reason why one would work and yet block another. I will let her know about the alphanumeric thing though.
We'll keep an eye out for any news on this matter.