I doubt it's any consolation, but mine did the exact same thing. For a long time my WiFi worked more-or-less fine, except that it would freak out when there were a lot of networks in the area and would only get a link-local IP. More recently, though, it seems to have gagged its last. It scans for a network and says none are available. Then if I wait a few seconds it will scan again and find my network. When I go to connect, though, it tells me there was a connection failure. Then it scans again and says there are no networks. Rinse, repeat.

I might have really loved the Nokia 770 ... that is, if it weren't just such a crap product.