Today i was discussing with my friend on some features of iOS4. He queried me stating his dictionary is not working for some reason, why so? I thought he didn't synchronize properly. Then finally we found the solution.
Step1: Goto Settings
Step2: Tap on General
Step3: Tap on KeyBoard
Step4: Make sure "Auto-Correction" is ON.
This way you will have dictionary and auto-fill words enabled. Follow the same step and OFF it for disabling.