"My personal preference on subdomains vs. subdirectories is that I usually prefer the convenience of subdirectories for most of my content. A subdomain can be useful to separate out content that is completely different. Google uses subdomains for distinct products such news.google.com or maps.google.com, for example. If you’re a newer webmaster or SEO, I’d recommend using subdirectories until you start to feel pretty confident with the architecture of your site. At that point, you’ll be better equipped to make the right decision for your own site." Excerpts from Matt Cutt's blog.
Neither. That being said, this is an information architecture question, not a search engine optimization one. If you're going to be having multiple types of related yet distinct content (such as sports, weather, politics, entertainment, and so on) on a site, like sports.yahoo.com, weather.yahoo.com, politics.cnn.com or entertainment.cnn.com for example), then you'll want to use a subdomain. If they're all related to each other yet still an integral part of the main site (like products or services), then you'll want to use a subdirectory. Anyone who tells you otherwise (for any reason) is probably full of beans.
Subdomains are treated as more independent I've noticed - search engines aren't as willing to switch between subdomains as they are subdirectories. Also, you can't use relative URLs with subdomains which is the biggest hinderance.