That looks nasty. I don't like giving people advice that has great potential to put them in a worse situation than where they are before I gave them advice. My first suggestion to you is to replace the LCD. You can find one here. Now I don't believe that the LCD could have received that liquid damage without the rest of the phone being exposed to it also. Please follow our water damage guide here to protect the rest of your investment. Use the guides here to remove the parts to be cleaned. I would highly suggest following the instructions in our water damage guide whether you deal with the LCD issue or not.
Secondly if you are prepared to buy another LCD and have the money to do so then there is no harm, no foul, in attempting to repair the current LCD, as the new ones are expensive. The liquid damage on this is actually behind the glass LCD itself and is on the reflective material and back metal casing. 90%+ failure rate on cleaning it as the plastic reflective material gets scratched and produces a similar effect as you have now. However you can transfer the reflective material from a cracked lcd into yours. You will need to remove the LCD from the phone. This guide will show you how to. I do not have an iPhone 4 display assembly, nor have I taken one apart, to give you exact instructions for the removal of the back metal casing. I have however taken a number of other LCDs apart and they all have been put together fairly similarly. Usually the back piece has a dog ear and the front casing has a slot it fits into or visa versa. Gently pry on those with the tip of a knife or jewelers screw driver on one side of the lcd to get them to release. If you can get them to release on the one side the back casing should pop off. You will find various pieces of plastic and paper behind the actual glass LCD. Pay close attention to the order they are in if you change their order it will affect the brightness of your screen. I imagine you can find a cracked LCD on eBay to acquire the reflective material you need. You will want to wear non powdered rubber gloves from the moment the case is popped until you are finished to keep the oils on your skin from getting on anything during the process. If you don't the slight smears will more than likely be visible. You will want a natural haired artist paint brush and a container of canned air to remove any dust from the glass lcd and back panel during reassembly. Many times a spec of dust behind the actual glass LCD is mistaken for a dead pixel as it produces a small dark dot.
Replacement display assembly includes LCD, front panel glass, camera bezel, and speaker mesh. Replace a broken, cracked, or shattered iPhone 4 display with this assembly. Compatible with iPhone 4 GSM/AT&T models. Black and white options. Kit and part only — 41 available at 94.95 each.