Is your IP address neighborhood
important for SEO?
It's mentioned in US Patent Application #20050071741 "Information retrieval based on historical data" (recommended reading if you're concerned with how Google works)
In one implementation, a list of
known-bad contact information, name
servers, and/or IP addresses may be
identified, stored, and used in
predicting the legitimacy of a domain
and, thus, the documents associated
... but that doesn't mean that Google presently uses the implementation described - still, why bother hosting in a bad neighborhood (which comes with all kinds of fun problems like e-mail delivery, regular SSH brute force scans, DDoS retaliation against your DoS'ing neighbors, et cetera) when there are plenty of other neighborhoods to choose from?
Keeping your free hosting service valuable for searchers at the Official Google Webmaster Central Blog has this advice for hosting providers:
If a free hosting service begins to show patterns of spam, we make a
strong effort to be granular and tackle only spammy pages or sites.
However, in some cases, when the spammers have pretty much taken over
the free web hosting service or a large fraction of the service, we
may be forced to take more decisive steps to protect our users and
remove the entire free web hosting service from our search results.
This statement reinforces the notion that Google actively penalizes content at the level of the hosting provider.