Here is a Step by Step Tutorial ....

This tutorial will show you how to upgrade your iPhone 4 to iOS 4.2.1 without upgrading its baseband using TinyUmbrella for Windows.

This will also Jailbreak your iPhone 4 with GreenPois0n as well

Please Note: This ONLY Works with the iPhone 4!

My iPhone is currently on 4.0.1 and updating to 4.2.1

iClarified - iPhone - How to Update Your iPhone 4 Without Upgrading the Baseband (Windows) 4.2.1

thanks Rugburn

OK, this is a reply how everything worked out.
After you start TinyUmbrella and Start TSS Server you can make certain that TinyUmbrella is working with out errors. Go to the * Log tab *.
You will see a GREEN check mark in front of TinyUmbrella's TSS server is running.
When you see this you know everything is ready... and you can now start up iTunes 10.1.2.17

I have Window 7 so i hit Shift and the Restore in iTunes... find your iPhone 3,1_4.2.1_8C148_Restore (firmware)
let this run...yes i was worried at first...thought it was updating the Baseband ...but no it was not.

Follow everything till you get the 1013 error ...click OK and close iTunes.
Move onto Step 10.) enter DFU. Start up GreenPoison and press Jailbreak.
Once you get back to Activation Screen ...if you have an Unlocked phone like i do ...just connect it up to iTunes and it will reset everything for you and you will be back to normal.

My iPhone is now Version 4.2.1 (8C148) with Modem Firmware 01.59.00

enjoy Rugburn