Step 4: After you have saved the SHSH, click on the “Start TSS Server" button. The application will now try to connect to the server and will kill iTunes during the process. If you DO receive any error during the process, you will not be able to proceed further.
Check the Log tab for detailed information about the process. If everything goes well, you should see a message like “TSS Server running successfully." When you see this message, start iTunes. Also, you should notice a green mark along with the message and now the Start TSS Server button should be saying Stop TSS server. Do not click on the Stop TSS Server button.
Step 5: Once iTunes has started, your iPhone will appear in the list. Do not update your iPhone when prompted by iTunes. Press the Shift key and click on the Restore button. This should bring up a popup window asking you to select the location of the firmware file.
Select the firmware file that you downloaded and click on the restore button to continue. iTunes will now restore your iPhone with 4.2.1 firmware.
Step 6: You should now get a 1013 error from iTunes. This is desirable and you should close iTunes once you get this error. 1013 means that your baseband has not been updated. Press Ok to continue.
If you get 16XX error, then put your iPhone in DFU mode and follow step 5 again.
If you don’t get 1013, it means that your baseband was updated.
Step 7: The next step is to jailbreak your iPhone 4 with firmware 4.2.1. Put your iPhone in DFU mode and follow the tutorial here:
How to Jailbreak iPhone 4 firmware 4.2.1 using GreenPoison
Note: Before following the next tutorial, make sure your iPhone is fully charged as you do not want to brick your iPhone during the jailbreak process. Also, please post your question here, if you encounter some problem or you get stuck with any problem while jailbreaking or updating your iPhone, so that other readers can also read answers for that problem.