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How about just trying to do what you think a visitor woiuld respond well to, and a search engine rep would not frown on? Often, our own internal radar is the best guide for building a lasting, well ranking site.
If you wanna dedicate yourself to spam (and I'm not saying that what your post implied) that's a whole other skill set, that involves learning how to push limits and successfully cross lines...not recommended.
But if you have cross-links BETWEEN domains then you will be penalized, and Yahoo is more strict about this than Google, no doubt because Google's algorithm is more sophisticated and is better able to distinguish between "white hat" cross-linking and "black hat" cross-linking.
you can link infinitely to other pages in the same domain (www.domain.com) and the search engine won't penalize this.
Don't know if we want to call it a penalty, a filter or a points system, but you can get in trouble by overdoing it on internal linking. How much of it has to do with kw use and how much has to do with link patterns is a bit of a moveable target, I think.
Some will say that the worst case is simply say that past some threshold, more internal linking just won't get you any credit. But I'm reasonably sure based on numerous tests we have done that certain internal linking patterns can be quite detrimental.
Typically, blogs' internal linking stucture is far from excessive. Plus if the blog is decent, it'll get lots of relevant backlinks from related sites. Great place to be. Great place to be from an SEO perspective.
Owners of standard Web sites (is that a term, standard Web sites? dunno), often abuse internal linking options, and get in trouble for it. Not any news there.
GG and MC have noted that the presence of bottom-of-page site-wide nav linkfests, for example, are often indicators of spammy properties. That's just one well known, obvious example. There are many other ways sites can get themselves in trouble with internal linking patterns.