It kind of depends on how many items you're searching. If it's a relatively small list, you can do a string.contains check on everything. So when the user types "A", you search the entire list:
for each contact in contacts
if contact.Name.Contains("A")
Add contact to results
Then the user types "T", and you sequentially search the previous returned results:
for each contact in results
if contact.Name.Contains("AT")
Add contact to new search results
Things get more interesting if the list of contacts is huge, but for the number of contacts that you'd normally have in a phone (a thousand would be a lot!), this is going to work very well.
If the interviewer said, "use the results from the previous search for the new search," then I suspect that this is the answer he was looking for. It would take longer to create a new suffix tree than to just sequentially search the previous result set.
You could optimize this a little bit by storing the position of the substring along with the contact so that all you have to do the next time around is check to see if the next character is as expected, but doing so complicates the algorithm a bit (you have to treat the first search as a special case, and you have to explicitly check string lengths, etc.), and is unlikely to provide much benefit after the first few characters because the size of the list to be searched would be pretty small. The pure sequential search with contains check is going to be plenty fast. Users wouldn't notice the few microseconds you'd save with that optimization.
Update after edit to question
If you want to do this with a million contacts, sequential search might not be the best way to go at the start. Although I'd still give it a try. "Fast enough for a million contacts" raises the question of what exactly "fast enough" means. How long does it take to search one million contacts for the existence of a single letter? How long is the user willing to wait? Remember also that you only have to show one page of contacts before the user takes another action. And you can almost certainly to that before the user presses the second key. Especially if you have a background thread doing the search while the foreground thread handles input and writing the first page of matched strings to the display.
Anyway, you could speed up the initial search by creating a bigram index. That is, for each bigram (sequence of two characters), build a list of names that contain that bigram. You'll also want to create a list of strings for each single character. So, given your list of names, you'd have:
r - ram
a - ram, feat, eat, a
m - ram
h - hello, hi
...
ra - ram
am - ram
...
at - feat, eat, at
...
etc.
I think you get the idea.
That bigram index gets stored in a dictionary or hash map. There are only 325 possible bigrams in the English language, and of course the 26 letters, so at most your dictionary is going to have 351 entries.
So you have almost instant lookup of 1- and 2-character names. How does this help you?
An analysis of Project Gutenberg text shows that the most common bigram in the English language occurs only 3.8% of the time. I realize that names won't share exactly that distribution, but that's a pretty good rough number. So after the first two characters are typed, you'll probably be working with less than 5% of the total names in your list. Five percent of a million is 50,000. With just 50,000 names, you can start using the sequential search algorithm that I described originally.
The cost of this new structure isn't too bad, although it's expensive enough that I'd certainly try the simple sequential search first, anyway. This is going to cost you an extra 2 million references to the names, in the worst case. You could reduce that to a million extra references if you build a 2-level trie rather than a dictionary. That would take slightly longer to lookup and display the one-character search results, but not enough to be noticeable by the user.
This structure is also very easy to update. To add a name, just go through the string and make entries for the appropriate characters and bigrams. To remove a name, go through the name extracting bigrams, and remove the name from the appropriate lists in the bigram index.
