Faulty power button on an iphone 3g and upgrade to 4.1

From my experience, 3.1.3 is indeed the best version for iPhone 3G, if you don't want any new or updated app. I've installed 4.2 on an iPhone 3G and it does become slower, though not so bad. If you put side to side a 3G with iOS 3 and one with any version of iOS 4, you'll see the 3 outperforming the 4 for most tasks (other than some native multi-tasking maybe). Other than the slightly faster performance, the best iOS for any iDevice is the latest one, like wjlafrance said.

Unless it is jailbroken, I can't tell what could possibly make iOS 3 slow. On iOS 4 it is only multitasking that can harm the performance AFAIK. Same issue with jailbreaking - gets slow if you install too much stuff running on the background. And an old device will suffer aging impact only on the battery. Hopefully a fresh restore would solve the "sluggish" but I'm afraid it might not.

Anyway you can easily* downgrade without jailbreaking. On 3G, you just* need the right file, enter DFU mode and option+click on Restore from iTunes.

* It is that simple, but there is more to it and it can become complicated. If you need more details, try this guide on lifehacker or this another even more detailed one on redmondpie.

You need to save the SHSH blobs for your phone.

This can be done by:

1. Allowing Cydia to save them for you automatically.
2. Using TinyUmbrella to back up the blobs to your computer.
3. Install iSHSHit from Cydia, which can access your SHSH blobs, save them on your phone, and send them as email attachments.

Currently Apple is blocking access from Cydia to the servers that give the SHSH blobs out, so options #2 and #3 are left.

Finally, Apple is no longer signing for 4.1, so unless you already backed up SHSH blobs somehow, you will not be able to downgrade.