Requirements:

• iOS 4.2.1 original firmware of your device saved on your computer (Download Here)
• iTunes 10.1.2 installed on your Mac (Download link)
• Download PwnageTool 4.1.3 for Mac

Modifying PwnageTool

Step 1: Download PwnageTool bundle (via) for your iPhone 4 device. Extract the .zip folder, and copyiPhone3,1_4.2.1_8C148.bundle to your desktop.
Step 2: Download PwnageTool 4.1.2 and copy it to your desktop. Right click, and then click on "Show Package Contents”
Step 3: Copy the .bundle files to PwnageTool.app/Content/Resources/FirmwareBundles/

Step 4: Copy info.plist goes inside PwnageTool.app/Content/Resources/CustomPackages/CydiaInstaller.bundle/   (IMPORTANT IF YOU WANT CYDIA IN YOUR IPSW)

Building a Custom Firmware

Step 1: Launch latest version of iTunes 10.1.2 and sync your iPhone 4 with your Mac for backup.
Step 2: Double click to start PwnageTool. Click Ok, if prompted with a warning. Click to select Expert Mode from the top menu bar and then select your iPhone 4. Click Blue arrow button at the bottom right to continue.

Step 3: Click the Browse for IPSW… button and then select your firmware from the Pwnage folder (refer Step 2).

Step 4: You will be prompted to select one of the option from following window. Select General then click the blue arrow button to continue.

Step 5: Under General settings "DO NOT” check Activate the phone. This bundle supports legit activation only

Step 6: Now the Cydia settings window will allows you to create custom packages. Double click any of the packages to select. For example, double click on OpenSSH, it will then appear under Select Packages tab.

Step 7: Click Select Packages Tab and then select OpenSSH as shown in the screen below.

Step 8: You are now ready to begin the pwnage process! Click the Build button to select it then click the Blue arrow button to begin.

Step 9: PwnageTool will now create the custom .ipsw file for your iPhone. You will be prompted to save custom .ipsw firmware file. Save it to the desktop. It might take 10-15 minutes for building custom firmware.

Step 10: Now its time to restore your iPhone 4 to this custom firmware iOS 4.2.1.

• Click on your phone icon from the sidebar in iTunes.
• Press and hold left "alt” button ("Shift” button on Windows) on the keyboard and then click on "Restore” (Not "Update” or "Check for Update”) button in the iTunes
• Now, release the "Shift” button.

Step 11: iTunes will now prompt you to select the location for your custom firmware 4.2.1 Once your iPhone 4 is successfully in DFU mode.

Step 12: Once In iTunes, hold the Alt/Option key and click Restore.

Step 13: Now select the custom IPSW that was created and click the Choose button. Wait for a while till iTunes installs the new firmware 4.2.1 on your iPhone. After the installation is done, iPhone 4 will restart automatically. You have now successfully jailbroken iPhone running iOS 4.2.1.

Step 14: After jailbreaking iPhone 4 on iOS 4.2.1, you can now restore all your settings, apps, contacts and photos to the newly installed firmware version iOS 4.2.1 by restoring the backup that you made in Step 1 from iTunes.