IPhone – Why is the iPhone 3GS proximity detector not working

This is a known issue. Apple addressed it in IOS 4.1 beta 2. Until it gets released, the simplest thing to do is talk using your headset and lock the screen (note that for some reason Apple removed the screen lock functionality without the headset).

I'm afraid you've busted your iPhone. There's no easy solution.

That power button is known to be a weak spot, and submitting the phone to excess humidity (or direct moisture) is never a good idea, even if you weren't planning to be in that storm.

From your description it sounds like the switch is slowly corroding. It will not get better, only worse over time. I'd suggest to have the phone serviced as long as it's otherwise still in good condition, or give up and replace it sooner than planned.

You could also try to repair it yourself by opening it up and cleaning that switch, but it might not even be possible, and worse: you risk breaking your phone. Have it serviced instead.