tedster - 6:27 am on Aug 15, 2011 (gmt 0)
Here's how I understand it.
If you see a 404 link coming from a good site, then finding a way to redirect it can give you credit for that backlink and give any traffic it generates a good experience. However, ignoring a 404 coming from another site will not actually HURT you, it just might be a missed opportunity.
Of course, lots of 404 links coming from your own site would be a very negative signal.