Actually, it's Yahoo and Ask that treat nofollow links as any other link, see this article on Wikipedia. Google supports the use of the rel="nofollow" attribute for the reasons put forward by rainborick, so Google certainly won't penalise you for PageRank sculpting of your website. It is worth mentioning, as Snowbird already did, that websites can gain ranking from optimised anchor texts, even if nofollow links are used!
I don't use nofollow. I just use robots.txt and meta tags.. Just put no follow in the meta tags of the pages that you don't want index and/or followed and you're good.
No, Yahoo! does not treat "nofollow" links as every other link. If you check that same Wikipedia article carefully, you'll see that Yahoo! does not use them for ranking, just like Google and MSN who were among the big three that created this usage. You can also find this confirmed in Yahoo!s own documentation at http://www.ysearchblog.com/archives/000069.html. Its just that Yahoo! can show those links in their SiteExplorer stats. So will Google. MSN isn't showing backlinks these days, so the issue is moot there.
And the answer is...you guessed it...NO! Read the article from Google Guru Matt Cutts about the appropriate uses of the nofollow tag.
I recall Matt called it a second tier optimization technique. SEOMoz had a a video/article about it as well claiming pagerank sculpting increased their search engine traffic by 20 percent. Personally I also do a little PageRank sculpting in my own website.
Google (and Matt Cutts) endorses pagerank sculpting. I've used it with great results. It makes sense now and it's harder for websites with a lot of money to buy their rankings. I think it's a great idea, but I think blogs are going too far. Nobody will bother writing a "quality" comment anymore.
I recently wrote a little, simple "How To" guide here if anyone is interested: http://gazebo.commonplaces.com/2008/09/how-to-sculpt-your-google-pr-using-nofollow/
And this is the importatn statement from Cutts: My short answer is that the nofollow attribute on links is a pretty general mechanism, and you're welcome to use it how you like