The Dev Team just updated RedSn0w to version 0.9.6b4, which will jailbreak iOS 4.2.1. As we explained yesterday, thanks to a combination of pwnage2 exploit, the arm7_go exploit, 24kpwn, and LimeRa1n, you will get an untethered jailbreak for iPhone 3G, older iPhone 3GS, and non-MC iPod touch 2G.
Unfortunately, other devices will get a tethered jailbreak, which means you will have to plug your iPhone in and launch RedSn0w every time you reboot...