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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?

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The tool you want to use is iTune's Restore to Factory Settings, found in the General tab when your iPhone is connected to iTunes.

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.
It will also take all your apps, music, videos, and other media off the iPhone, as well as erasing all your settings and resetting them to the defaults. Basically, your iPhone will be just like it was when you bought it.

Directions on how to perform this operation (and restore afterwards from a backup) are available in the Restoring section of this Apple help document.

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Thanks a lot for the response. But wouldn't iTunes' Restore to Factory Settings force me to update the firmware? – Pablo Santa Cruz Mar 14 '11 at 12:15
@Pablo, yes, as I said in the answer (iOS updates = firmware updates). – Nathan Greenstein♦ Mar 14 '11 at 14:28
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The restore function does not roll back firmware versions. Jailbreakers wouldn't have to worry about not updating if that were the case. The restore function blanks all your data. You network settings, your phone settings, media, apps, etc. (It does not affect the sim card, if applicable.) Whether you do it on the phone itself, or via iTunes, you will wind up with an empty version of the currently installed iOS version. – Jason Salaz♦ Mar 14 '11 at 17:25

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