[Update] An update has recently been released and has made this app even better. Now you can scroll to what fret you want, have the music play in the background, quickly turn on and off distortion, and playing is smoother than ever.
PocketGuitar[99 cents], the number one paid app by Shinya Kasatani is a stellar guitar simulator. You can control how big the frets are, how far apart the strings are, and how much space there is to strum.
Also you can add effects, distortion chorus and delay. You can pick pick what type of guitar you want to use, have an accelerometer effect, whammy bar, pluck autiomatically when you press the frets, have it be left handed, and have alternate tunings.