Google Webmaster Tools shows I have quite a few 404 Not found pages.... I am correcting the problem now... Do you think its possible that errors such as 404 not founds can affect rankings?
It's a tough call, because your competitors would link to your 404 pages to hurt your rankings it were true.
What do you mean link to them? I mean when Google crawls your site and sees you have a bunch of errors.... does anyone have any experience in this, as far as them dropping on the SERP's?
If I'm not mistaken Google is very upfront about broken links being a bad thing. Check the archive of Matt Cutt's blog, I believe you will get an answer
Remove your 404 pages from: Google Webmaster Tools > Tools (in left panel) > Remove URL's I think this is the fastest way to remove 404 error pages..