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I know of several cases where crappy inbound links, without reciprocation, caused a site to be banned. Then throw a spam report into that or a search engine quality review. There is no algo or hand check that can tell which site generated the spammy inbounds themselves and which one was the victim of Negative SEO.
[edited by: martinibuster at 7:23 am (utc) on May 5, 2008]
google's algo was created in a way that does not allow to harm your rankings because of incoming links.
Actually this is quite untrue. It is very possible to hurt competitors with inbound links if you are the type of person who actively pursues these types of tactics.
Unfortunately, for us honest folk, there is very little you can do if it happens, but you will want to setup a Google webmaster account and make sure you submit a reinclusion request explaining what has happened.
...if you are the type of person who actively pursues these types of tactics.
I think maybe idolw was not addressing that part of the question. If bad inbounds alone negatively affected rankings then the rankings of many quality sites would have dropped because of all the scrapers and cloakers linking to them. I think that's what idolw is addressing.
But when you combine spammy inbounds with an active pursuit of a specific negative result, that's a different situation. So i think you're both right. :)