A blue bar appears across the top of your iPhone screen that says "Internet Tethering" when an external device is using your iPhone's Internet connection. | Source
Turn on Personal Hotspot
Tap the “Settings” app on your iPhone’s home screen. The Settings app looks like a gray gear.
Tap “General” at the top of the second grouping in the Settings screen and then tap “Network.”
Tap “Personal Hotspot.” If you don’t see Personal Hotspot and instead see Set Up Personal Hotspot, your iPhone hasn’t been set up to support tethering and you need to contact your cellular data provider to see what’s required for you to set up tethering on your device. The cost to set up tethering on your iPhone depends on your cellular data provider.
Tap the “ON/OFF” toggle to the right of Personal Hotspot until “ON” appears in white lettering on a blue background. Your iPhone has now been set up as a personal hotspot so that you can tether devices to your iPhone.
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Tap the space to the right of password to bring up a keyboard on the lower half of the iPhone screen.
Type the password you want to use as the password that’s required when other people attempt to use your iPhone’s personal hotspot.
Access Personal Hotspot with External Device
After enabling the personal hotspot feature on your iPhone and setting up the password for access to the personal hotspot, open the list of wireless connections available to the device you want to tether to your iPhone.
Select the name that is assigned to your iPhone. The name of your device can be found by connecting your iPhone to the computer you use to sync it with iTunes and then opening iTunes. The name of your device is listed on the left side of the iTunes program window beneath Devices.
Enter the password you set up for your personal hotspot when prompted. You can now use your iPhone’s 3G network as a wireless network on your external device.
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You can only have up to five different devices connected to the personal hotspot at any one time.
You will know when an external device is tethered to your iPhone because a blue bar appears across the top of your iPhone screen that reads "Internet Tethering" when an external device tethers itself to the personal hotspot you set up on the iPhone.
You can only use the 3GS and newer models of the iPhone; models older than the 3GS don’t have the personal hotspot feature.
Tethering the iPhone to external devices drains the iPhone’s battery. Ensure you have a full iPhone battery before connecting external devices, and also make sure you have a charger nearby for your iPhone.
Be careful about how much data you access using the iPhone’s 3G connection. Contact to see if there is a limit for the amount of data you can use each month using your device. If there is a data usage limit and you exceed it, you’ll face additional fees from your cellular data provider. You can see how much data you’ve used by tapping “Settings,” “General,” “Usage” and then “Cellular Usage.”