I want to do an "Erase All Contents And Settings" on my iPhone 4. Will that require internet access and upgrade to the latests firmware? Or it will just erase everything and leave iOS firmware version as it is right now?
The tool you want to use is iTune's
While I haven't used this on an iPhone, I am reasonably sure that it will remove your iOS (firmware) updates so that you will have to re-download them.
Directions on how to perform this operation (and restore afterwards from a backup) are available in the