By default you cannot use an MP3 as a ringtone on iPhone. Apple wants you to purchase ringtones even if you own the MP3. However, there is a way around that!
Open up iTunes and right click on the MP3 you want to use as a ringtone. Select Get Info and go to the Options tab. Choose a reasonable length for the ringtone by setting the Stop Time, otherwise iTunes will complain later on, and then click OK.
Now right click again on the MP3 and choose Create AAC Version. You will notice that iTunes created another MP3 with the duration you have set earlier. Now just drag this MP3 to your Desktop and rename its extension from .m4a to .m4r.
You are nearly ready! Open up the dragged .m4r file and it will be automatically added to iTunes in the Ringtones section. Now just sync with your iPhone and you are ready to use it as a ringtone!