There is no traditional mute capability on the PocketPC phone edition itself. Some users have suggested that you can put the call on hold if there is noise in the background, but then you wouldn't be able to hear. Traditionally, mute allows hearing, but not speaking. One option you have is to use the headset that comes with the T-Mobile, Siemens/ATT, or O2 phones. By using the headset, it is going to provide less background noise to your caller. But, the headset also has a button that will mute the call if held in. You must continue to hold the button in for it to mute the call. It appears that adding a mute button to the phone itself is something that could be done in software, so hopefully Microsoft will see fit to provide it in an update at some point.
Update... copy of news item from pdaPhoneHome

Probably THE single most complained about missing function in the Pocket PC Phone Edition OS from Microsoft is the lack of a Mute function. Well if you are one of us that wishes this function was available, your wait is over. The latest version of Phone Today from
Burr Oak Software has added the capability to Mute your call. Notice the Muting Indicatore/Control in the picture.
Phone Today is a Today Screen plugin which displays the status of your connected GSM phone, or Pocket PC Phone Edition device. Phone Today works with any GSM phone which is connected to your Pocket PC through a serial connection, and which supports GSM 07.05 and 07.07 AT+C commands, or with Pocket PC Phone Edition devices such as the XDA/MDA. The following updates are provided in this version:
- Call Log 1.03 with new format and fix for missing "+" with Ericsson phones
- Support for Muting of calls (Pocket PC Phone Edition)
- Support for display of SMS messages on SIM (Pocket PC Phone Edition)
- Support for launch of Speed Dial Application (Pocket PC Phone Edition)
- Workaround suspected MAPI memory leak
You can download a trial for Version 1.0 RC1 right here in the
pdaPhoneHome Downloads area.