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Open iTunes on computer. Connect iPhone to computer with USB cable. Hold both Home and Power button, after exactly 10 seconds release the Power Button, keep holding the Home button until iTunes recognizes iPhone in Recovery Mode, usually about 20 seconds time. If the iPhone screen is black, blank this is DFU Mode. Click the Restore button of iTunes. DFU Mode can be difficult to enter sometimes, just keep trying. DFU Mode is a black, blank screen with iTunes saying Recovery Mode.
Now follow the steps in the window to begin entering the DFU mode.
Step 1: Turn off your iPod touch / iPhone completely and connect to PC / mac
Step 2: Hold down the Power button for 3 seconds
Step 3: Without releasing the power button, also hold the Home button for 10 seconds
Step 4: Without releasing the home button, release the power button and keep holding the Home button for 20 seconds.
It's actually called Device Firmware Update. Here is a step by step guide. It should be the same on the iPhone 4 as other iPhones.