You have to note that Cydia doesn't work till now due to some issues on the private APIs used by Cyida which has been changed by Apple. Bud don't worry the developers has fixed these issues and it is only a matter of time as they are waiting for the iOS 4.2.1 public release. For now you can install jailbroken-apps via SSH - until we got the new Cydia version - as you have full root access on your iOS device.
STEP 1: Download redsn0w 0.9.6b2, iOS 4.2.1 GM and iOS 4.1 final version for iPhone 4, 3GS, 3G, iPod touch 4G, 3G (download links at the end).
STEP 2: Update to 4.2.1 GM firmware using the IPSW file you just downloaded via iTunes.
STEP 3: Launch Redsn0w 0.9.6b2, and Browse for iOS 4.1 firmware final version (NOT iOS 4.2.1 GM).
STEP 4: Select "Install Cydia" and click on Next
STEP 5: Now make sure your device is both OFF and PLUGGED IN to the computer before you click “Next”.
STEP 6: At this stage you will need to put your iPhone in DFU mode by holding “Power” button and then while holding the “Power” button, you will now have to hold “Home” button too. Now after few seconds release “Power” button but keep holding “Home” button until installation begins.
STEP 7: You will Get a Jailbroken Device on the latest iOS 4.2.1 GM as soon as the process ends.
NOTE: If you have an unlocked iDevice with ultrasn0w, you have to stay away from Redsn0w, as it updates your baseband to latest version, which is still unlockable till now.
Download iOS 4.1 (Final version) for iPhone 4, 3GS, 3G, iPod touch.
Download iOS 4.2.1 GM for iPhone 4.
Download iOS 4.2.1 GM for iPhone 3GS.
Download iOS 4.2.1 GM for iPhone 3G.
Download iOS 4.2.1 GM for iPod touch 4G.
Download iOS 4.2.1 GM for iPod touch 3G.
Download iOS 4.2.1 GM for iPad
Download Redsn0w 0.9.6b2 for Windows and Mac