Issue with iPod Interface accessory

My 2009 toyota prius is hardwired for an iPod/iPhone with the official Interface Kit accessory.

Before today I have never had a problem playing downloaded music on my iphone 4 in the car through the built-in controls (which run through the AUX in the stereo). If I wanted to listen to audio through another media player on my phone (i.e. pandora or streaming radio) it was also never an issue. I could push play it would override the phone's ipod music.

Until today.

Now whenever I try to play pandora (as just one example), it plays a song for approx 5 seconds and then the car audio switches back to the songs on my iphone's ipod. Once I deleted ALL music from my iphone these streaming radio stations play without issue.

Is this related to OS 4.1 which I just updated to today? Strangely on my home's Bose dock I do not have the same problem. So it must be something with the Toyota accessory.

Any advice for how I can remedy this? I'd ideally like to be able to have downloaded music on my iphone but retain the ability to override the "ipod" app with streaming audio choices while in my car.

Thanks!
John