I don't think 404 errors in WMT have to do anything with traffic drops/rankings etc.
FYI i have 1.200.000 errors, no problem with that. Google tries a lot of urls such as
Despite the fact that i use rel="prev" rel="next", and i also use NOINDEX on these paginated pages.
Of course in some situations where you don't use right guidelines to tell google what to index and what not to index 404 page increase can mean something but it does not HAVE always. At least in my situation i think it means nothing.