Tap the action button at the center of the toolbar.

Select Add Bookmark.

Take note of the name and bookmarks folder, then tap Save.

Tap the bookmarks button at the toolbar.

Tap Edit, then tap the bookmark you just added ("Download You...").

Hold your finger on the URL (e.g. http://getbookmarklet.com...) until the magnifying glass comes up. Drag your finger to the left and scroll all the way to the beginning.

Stop and position the cursor right before the "j" of "javascript". Delete everything to the left so that the URL starts with "javascript:". When you are done, your bookmark should look like this:

To use it, simply open a YouTube video page, tap the bookmarks button and select "Download YouTube Video".

UPDATE: On iPad, you have to tap on the play button to start playing the video before opening the bookmarklet.

Make sure you are on YouTube mobile site. If you are not sure, then go to the "Settings" screen, tap "Clear Cookies", set the value of "Identify Browser As" field to "Mobile Safari (Default)" and refresh the browser.