Depends what deck you are using... There are different ipod accesorries for every deck but, I have found that some decks do not work at all. There just is some missing compatibility for some reason.
Post your manufacture/model maybe I could help.
I just got mine working with my Eclipse AVN7000 with the IPC-106 (ipod adapter).
http://www.modmyiphone.com/forums/showthread.php?t=6177
This is just another thread that I created about my stereo problems and conclusions. It's still a work in progress but I would love if there could be an area just for Iphone Car Entertainment or something along those lines associating, Bluetooth hook ups, Car Stereos for IPod, and possible in the future TV-Out for certain decks such as the possibility of the AVN7000 because you can actually watch TV or a DVD on it.
I actually did this twice but have yet to find out how I did it both those times...
I was sitting in my car listening to my iphone music and I went to Safari for a second and then went back over to my ipod section after pushing the home button and all of the sudden I was able to select what songs and albums I wanted to listen to with out having to see that stupid Accessory screen.. I'll up date everyone more on this when I actually figure out how I accomplished this 2 times. haha
And the reason why the music fades out from your Car Stereo is the same concept when it's not connected to the stereo.. If you're listening to your ipod with headphones or through the speaker and you recieve/make a phone call your music automatically fades out/in when your done with the call. It's nothing special with the stereo system.
I think that I'm going to try to buy an A/V Ipod cable and see what happens here since I finally got it to work through the IPC-106. I would love to hear my phone calls through my stereo system when I'm driving and use a bluetooth mic to speak to them but then again wouldn't the person you're speaking to hear themselves from the speaker output reaching that bluetooth mic? I dunno just an idea.