Several users have reported an issue where iTunes fails to properly synchronize contacts with the iPhone, hanging repeatedly at the "Syncing contacts" phase.
It appears that in most cases, this issue has to do with individual contact entries that contain problematic data. For instance, some users have reported that the issue started after photos were added to contacts on the iPhone.
Try creating a smaller group of contacts in your chosen application (Mac OS X Address Book, Entourage, Outlook, etc.) and re-attempt synchronization. If it works, add a few more contacts in batches and continue to re-attempt synchronization until the problematic entries can be isolated.