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
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.