[youtube=http://www.youtube.com/watch?v=r7-rC6TVcpQ&feature=player_embedded]

If you have an iPhone, you’ll want to get the free updated app Skype released Wednesday along with this YouTube video showing how it can be used to see your friends dancing in their underwear.

Skype now supports two-way video calling on the iPhone 4, iPhone 3GS and fourth-generation iPod touch, not just over Wi-Fi networks — which Apple’s (AAPL) FaceTime can do — but over 3G cellular networks as well. That’s a major advance.

FaceTime is still easier to use — Skype’s user interface lacks that Apple touch. But with an installed base of more than 560 million customers and an app that lets you make video calls from anywhere you can make a voice call, Skype’s got a huge advantage — especially if it comes out with a Google (GOOG) Android version at CES next week.

Steve Jobs said he wanted to make FaceTime the industry standard for video chatting, but Wi-Fi-only video calls won’t cut it anymore.

Below: Skype ticks off the improvements offered by the update.

• Make Skype to Skype video calls on WiFi and 3G*
• Call Skype desktop users (Mac OS X or Windows) and other iPhone users.
• Two-way video calls supported on iPhone 4, iPhone 3GS and iPod touch 4th gen.
• Receive only video supported on iPad and iPod touch 3rd gen, with no camera.
• Make video calls in portrait and landscape.
• Skype video calling requires iOS 4.0 or above.
• *Additional Data charges may apply

Via Engadget.

[Follow Philip Elmer-DeWitt on Twitter @philiped]