DevTeam worked hard for the last several hours and released jailbreak tool for iOS 4.2.1. It is redsn0w 0.9.6 b4.
New redsn0w 0.9.6 b4 uses limera1n exploit and will successfully jailbreak all devices. The only problem is that it is a tethered jailbreak, which means you will have to plug it to a computer and rerun redsn0w on every reboot. This so called tethered or semi-tethered jailbreak. This condition applies to iPhone 3GS (new bootrom),
Old devices like iPhone 3GS (old bootrom), iPhone 3G and iPod touch 2G (non-MC model) can be jailbroken-untethered right now using this latest version of RedSn0w.
You can download RedSn0w 0.9.6 b4 here.