@OP... its nothing of Software problem... I have iPhone 3G and same issue.. If I keep it in 1 meter range of Router I get full signal.. If I go 10 feet away the signal drops. I was scammed by PG member here and he sold me that faulty set.
It is Wifi Antenna Getting Damaged... this normally occurs if u drop mobile too many times..or just once very badly... The antenna normally encircles the frame of Mobile.. if this antenna breaks in middle and your range drops...
Its not Software issue at all..
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PS: Always check for Wifi and Blluetooth before buying a used mobile... Personal Experience...