Said and done. Quest Visual has just released an iPhone application that does exactly this, translating from English to Spanish and Spanish to English any text detected with the camera and overlaying it in real time while maintaining the same perspective.
Word Lens works thanks to an optical character recognition (OCR) system in a similar way to Google Googles but unlike this one, no Internet connection is required to work and the translation is presented directly over the real world through the camera creating a really striking effect.
The application is available for free in the App Store but by itself it is only able to work as a demo by inverting or deleting the characters. To access its real function as a translator you have to buy one of the dictionaries at the launch price of 3.99 euros (double from next year). Word Lens is only compatible with iPhone 4 and 3GS or the 4th generation iPod touch and requires iOS 4 to work.