Since the end of January, YouTube has switched their default embedding option from <object> to <iframe>. The switch was made to offer better functionality on mobile devices. The new <iframe> embedding options will allow users to view videos in either Flash or HTML5. Get the full skinny at: http://techie-buzz.com/tech-news/youtube-iframe-embed-tags.html
This switch has created an issue for WordPress 3.0.4 and below because <iframe> embed code gets stripped from posts when switching from HTML and Visual modes.
The simple solution now is to just enable “Use old embed code” from YouTube’s embed options.
And there you have it, a simple fix to an annoying problem. I am sure WordPress is working now to patch the issue. Look for WordPress updates in the near future with a fix!