A problem with this proposal is that a impl Iterator<Item=Result<_, _>> type suggests that the iterator may continue yielding elements after an Err(_) is returned, but this syntax leaves little room for processing them. If the iterator type clearly communicated that no further elements can be returned after an Err, this would not be such a problem.
A while ago, I came up with this design, as part of a larger proposal (first sketched in this thread), but it could be adopted mostly independently of the larger one.