The iPhone screen is, and probably always will be, 3.5 inches. But Android handsets have gotten enormous over the last year or two, to the point where 4.3 inches feels standard, if not a bit small. Why is that?
Android OEMs and Google responded to the 3.5-inch 960×640 Retina display by improving the pixel format to 1280×720. But because Android renders text and graphics like Windows or OS X, increasing resolution above 320 ppi means smaller UI elements. The display had to grow in size to compensate for shrinking UI elements.
Basically, the way iOS uses its increased resolution is to increase the clarity and sharpness of what it displays. Because of the way Android's rendering engine is currently set up on most phones, matching the iPhone's resolution but keeping the same 3.5-inch screen size would make the icons and text about one fourth smaller. (Note that it is possible for Android devices to rival the retina display clarity, and some recent phones like the HTC Rezound have higher pixel density than the iPhone, but they're in the minority.)
That would make text uncomfortably small and reduce the size of on-screen tap targets. To match iPhone resolution and maintain usability, while still using the same rendering techniques, Android phones will always have to be bigger.
One final thought: with the iPhone still market-leader, I think it's fair to say that people neither desperately want nor need massive screens on their phones. Size: it doesn't matter, guys.