"File Not Found" requests handling

I wonder about this setting. Does anyone have any input as to whether this option: Redirect to homepage

has any negative effects on SEO? Do you think it would be bad to have a bunch of 301 redirects to your main page from urls no longer valid?

I think I would rather redirect all 404's to my main page rather than show a 404 but do not want to do so at the cost of search engines not viewing it in a way that would be positive to my rankings.

Yeah, it's a bad idea. You don't want 10000000 301's pointing to your home page.

The correct thing to do is to 404 them.

Google has a new 404 utlity in webmasters that adds a nice search box and rec's based on what was entered.