Over at the Google Groups forum, yet another Googler said that bad links to your site cannot hurt you, at least for the most part.
Wysz, a Googler, said in response to someone being worried that a spammy site is linking to his site.
I wouldn't really worry about spam sites hurting your ranking by linking to you, as we understand that you can't (for the most part) control who links to your sites. However, there is some action you can take if you come across spam in Google's index. The preferred method of reporting spam to us is by clicking on "Report spam in our index" while logged into Webmaster Tools. If you don't have a Webmaster Tools account, you can use our non-authenticated spam report form: http://www.google.com/contact/spamreport.html
This is not the first time Google has spoken up about this. In Google's Adam Lasnik Speaks On What Links Can & Can't Hurt You we pretty much covered the same thing. I said there, "a link to a bad place "here and there" won't necessarily hurt you, but if "patterns" of bad links are seen, then you need to worry."
You may also want to read, Can Competitors Damage Google Rankings? by Chris Boggs and Can a Competitor Hurt Your Google Rankings? that I sourced from Google earlier.
Forum discussion at Google Groups.
