The Dev-Team has just released the third update for redsn0w, which now works on the latest iOS 4.2.1 GM build. Users will need to compile Cydia on their own if they choose to use this program, so it’s not for the faint of heart.
redsn0w has also been updated to recognize the 4.2.1GM IPSWs. *However*, as noted above, the 4.2.x jailbreak is not yet untethered for most devices! That means until someone like @comex comes up with a way to untether it, you must use redsn0w (or a similar utility) to boot your device into a jailbroken 4.2.1 state. (The only exceptions to this are the iPhone3G, non-MC iPod touch 2G, and old-bootrom iPhone3GS. redsn0w will jailbreak those untethered!)
Please, read through the blog post in its entirety, and peruse the comments if you have any questions. This release is not a simple one-click jailbreak.