TheBigK - 6:18 pm on Dec 16, 2012 (gmt 0)
@Frost_Angel: Thanks. It does help me in my analysis and my ongoing observation of the situation.
@dilberry: I might be completely wrong and they might be completely right. It's just that I'm believing what I see in the stats - that my traffic dropped at the same time when the error count shot up. I'm not sure if that's a pure coincidence with something else that decided to rank our site lower. I do see several low quality websites outranking our pure, original content.
I fixed the problem by redirecting all the error URLs to correct URLs. I don't know if that was a right thing to do; because had I not done that, I'd still be sitting with ~90k errors, making Google think our site is still crappy and not improving our crawl rate.
I'll only know whether my solution worked if our traffic restores after the error count drops. I'll keep everyone updated.