Sub domains or folders - which is best?

I've seen a number of discussions on SEO forums debating the relative merits of using a sub domain versus a folder. A typical question goes like this...

Which is better for SEO - a sub domain site, or pages in a folder on my existing site?

What's interesting about this question is the answer depends on the main objective of the person doing the asking.

Does the person want a quick way to achieve a page listing for a particular keyword phrase? A sub domain can help with this if...

• The keyword phrase isn't too heavily contested by well-established sites with high PageRank and many solid contextual links
• The resulting site will focus entirely on the keyword phrase in question, and contain sufficient pages of unique topical content

On the other hand, is the person looking to boost a site's overall ranking in Google by expanding the number of keywords they get a page one listing for? If so, keeping the pages internal to the site is the better approach.

If the main site isn't ranking well for any useful keywords, then it's almost certain the person should focus on it first. And in particular, should learn more about the internal contextual link.