It has been confirmed by MuscleNerd from iPhone Dev team through his tweet that Redsn0w 0.9.6b7 will allow you to untether your iPhone jailbreak on iOS 4.2.1 without having to restore your device. Here is the screen shot of MuscleNerd’s twitter status:

MuscleNerd: Thanks to comex, redsn0w can now handle much bigger files than ramdisk 25MB limit. Useful for “backup plan” 4.2 untether.

MuscleNerd: @jkurtz87 it shouldn’t require a restore…just another redsn0w run. (That’s the goal!)

Some of the features of Redsn0w 0.9.6b7 are:

MuscleNerd: Thanks to comex, redsn0w can now handle much bigger files than ramdisk 25MB limit. Useful for “backup plan” 4.2 untether

MuscleNerd: This latest @comex code also allows retrieval of photos+files stuck behind an unfixable filesystem problem…good stuff!