Doesn't the the touch area for individual keys change size depending on what is being typed? The behavior you are describing should be the same on almost any key.
I think they got rid of this feature a few versions ago because I haven't been able to reproduce it. I suspect (but have no evidence for) that this is related to the typing lag that was really bad in ios 2 or 3. From my perspective, it seems they weren't able to fix the realtime correction so they made it asynchronous and just fix up words after you hit space. This is how it seems to perform now (and let's them offer more features like multi word correction).