In a WebmasterWorld thread, the effects of 301 redirects are discussed. Can you be penalized?

Apparently, the answer is yes. Tedster notes that a number of webmasters, when they discovered the potential of 301 redirects, “started throwing [them] around like confetti.” The penalties were harsh and now he advises against using it.

How bad are the penalties? Tedster says that they can be so bad that your domain could lose trust in Google’s eyes — forever. He does acknowledge that reinclusion requests can be filed in the event of mistakes.

What about using 404s instead? Tedster advises against that:

Forum discussion continues at WebmasterWorld.