Step 1: Download iOS 4 (final version) for your version of iPhone and iPod touch. Download links are posted here.

Step 2: Update to this latest firmware using the iOS file you just downloaded via iTunes 9.2.

Step 3: Start Redsn0w 0.9.5b5-3 (download link given below) and point it to the original iOS 4 firmware file to proceed.

Step 4: Now select “Install Cydia” and click “Next”.

Step 5: Now make sure your device is both OFF and PLUGGED IN to the computer before you click “Next”.

Step 6: Connect your device in recovery mode by pressing the Power and buttons continuously

At this stage you will be presented with a screen where you will have to quickly hold “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: Sit back and enjoy while redsn0w will do all the rest for you. Once done, your iPhone and/or iPod touch will restart automatically and you will find it jailbroken on the latest iOS 4 firmware.
Download Redsn0w
http://sites.google.com/a/iphone-dev...attredirects=0

iPhone DevTeam's 3G and 3GS software unlock, now with added PwnApple. Compatible with basebands 04.26.08, 05.11.07, 05.12.01 and 05.13.04! Thanks to @sherif_hashim and @Oranav for contributing baseband crashes.

You can find instructions on how to install the UltraSn0w unlock
iClarified - iPhone - How to Unlock the iPhone 3G, 3GS Using UltraSn0w