<p>I need to store the user's password in my iphone app. </p>

<p>When posting an app to the app store, I have to tell Apple if there's encryption in the app for export purposes.</p>

<p>I don't want my app to be restricted to US only, but I also don't want to store or send passwords over the net in clear text.</p>

<p>So basically the question is, can I encrypt passwords in a way that will not get my app restricted?</p>

First, if the user name and password are encrypted and decrypted on the phone, then the decryption key is obviously also on the phone and pretty much worthless. I wouldn't worry about storing user names and passwords encrypted on the phone.
For secure communication, you should use SSL which is probably in a library that is already on the phone. If you use a library that is part of the phone OS, I don't think that means your app "contains encryption".
Of course, I am not a lawyer. Who knows - the law might consider "pig latin" a valid encryption technology.