From Google's Blog
So there you are, minding your own business, using Webmaster Tools to check out how awesome your site is... but, wait! The Crawl errors page is full of 404 (Not found) errors! Is disaster imminent??
Fear not, my young padawan. Let’s take a look at 404s and how they do (or do not) affect your site:
Q: Do the 404 errors reported in Webmaster Tools affect my site’s ranking?
A: 404s are a perfectly normal part of the web; the Internet is always changing, new content is born, old content dies, and when it dies it (ideally) returns a 404 HTTP response code. Search engines are aware of this; we have 404 errors on our own sites, as you can see above, and we find them all over the web. In fact, we actually prefer that, when you get rid of a page on your site, you make sure that it returns a proper 404 or 410 response code (rather than a “soft 404”). Keep in mind that in order for our crawler to see the HTTP response code of a URL, it has to be able to crawl that URL—if the URL is blocked by your robots.txt file we won’t be able to crawl it and see its response code. The fact that some URLs on your site no longer exist / return 404s does not affect how your site’s other URLs (the ones that return 200 (Successful)) perform in our search results.
Q: So 404s don’t hurt my website at all?
A: If some URLs on your site 404, this fact alone does not hurt you or count against you in Google’s search results. However, there may be other reasons that you’d want to address certain types of 404s. For example, if some of the pages that 404 are pages you actually care about, you should look into why we’re seeing 404s when we crawl them! If you see a misspelling of a legitimate URL (www.example.com/awsome instead of www.example.com/awesome), it’s likely that someone intended to link to you and simply made a typo. Instead of returning a 404, you could 301 redirect the misspelled URL to the correct URL and capture the intended traffic from that link. You can also make sure that, when users do land on a 404 page on your site, you help them find what they were looking for rather than just saying “404 Not found."
Q: Tell me more about “soft 404s.”
A: A soft 404 is when a web server returns a response code other than 404 (or 410) for a URL that doesn’t exist. A common example is when a site owner wants to return a pretty 404 page with helpful information for his users, and thinks that in order to serve content to users he has to return a 200 response code. Not so! You can return a 404 response code while serving whatever content you want. Another example is when a site redirects any unknown URLs to their homepage instead of returning 404s. Both of these cases can have negative effects on our understanding and indexing of your site, so we recommend making sure your server returns the proper response codes for nonexistent content. Keep in mind that just because a page says “404 Not Found,” doesn’t mean it’s actually returning a 404 HTTP response code—use the Fetch as Googlebot feature in Webmaster Tools to double-check. If you don’t know how to configure your server to return the right response codes, check out your web host’s help documentation.
Q: How do I know whether a URL should 404, or 301, or 410?
A: When you remove a page from your site, think about whether that content is moving somewhere else, or whether you no longer plan to have that type of content on your site. If you’re moving that content to a new URL, you should 301 redirect the old URL to the new URL—that way when users come to the old URL looking for that content, they’ll be automatically redirected to something relevant to what they were looking for. If you’re getting rid of that content entirely and don’t have anything on your site that would fill the same user need, then the old URL should return a 404 or 410. Currently Google treats 410s (Gone) the same as 404s (Not found), so it’s immaterial to us whether you return one or the other.
Q: Most of my 404s are for bizarro URLs that never existed on my site. What’s up with that? Where did they come from?
Q: Someone has scraped my site and caused a bunch of 404s in the process. They’re all “real” URLs with other code tacked on, like http://www.example.com/images/kittens.jpg" width="100" height="300" alt="kittens"/></a... Will this hurt my site?
A: Generally you don’t need to worry about “broken links” like this hurting your site. We understand that site owners have little to no control over people who scrape their site, or who link to them in strange ways. If you’re a whiz with the regex, you could consider redirecting these URLs as described here, but generally it’s not worth worrying about. Remember that you can also file a takedown request when you believe someone is stealing original content from your website.
Q: Last week I fixed all the 404s that Webmaster Tools reported, but they’re still listed in my account. Does this mean I didn’t fix them correctly? How long will it take for them to disappear?
A: Take a look at the ‘Detected’ column on the Crawl errors page—this is the most recent date on which we detected each error. If the date(s) in that column are from before the time you fixed the errors, that means we haven’t encountered these errors since that date. If the dates are more recent, it means we’re continuing to see these 404s when we crawl.
After implementing a fix, you can check whether our crawler is seeing the new response code by using Fetch as Googlebot. Test a few URLs and, if they look good, these errors should soon start to disappear from your list of Crawl errors.
Q: Can I use Google’s URL removal tool to make 404 errors disappear from my account faster?
A: No; the URL removal tool removes URLs from Google’s search results, not from your Webmaster Tools account. It’s designed for urgent removal requests only, and using it isn’t necessary when a URL already returns a 404, as such a URL will drop out of our search results naturally over time. See the bottom half of this blog post for more details on what the URL removal tool can and can’t do for you.
Also read John Mueller's post here https://plus.google.com/+JohnMueller/posts/RMjFPCSs5fm