So I found out about this over at SE Roundtable where the headline caught my attention.  It seems a little misleading “Major Google SEO Change: Google Prefers You Don't Use URL Rewrites”

You should still use URL Rewrites if you're either dealing with a smaller site like say a blog or an ecommerce site where it makes more sense to use a descriptive URL then one that contains a bunch of parameters humans can't read.  I've highlighted in red the main point you should keep in mind.  I also think having your keywords in the pages URL helps in your rankings.

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Here's what Google had to say…

Which can Googlebot read better, static or dynamic URLs?
We've come across many webmasters who, like our friend, believed that static or static-looking URLs were an advantage for indexing and ranking their sites. This is based on the presumption that search engines have issues with crawling and analyzing URLs that include session IDs or source trackers. However, as a matter of fact, we at Google have made some progress in both areas. While static URLs might have a slight advantage in terms of clickthrough rates because users can easily read the urls, the decision to use database-driven websites does not imply a significant disadvantage in terms of indexing and ranking. Providing search engines with dynamic URLs should be favored over hiding parameters to make them look static.

Myth: “Dynamic URLs cannot be crawled.”
Fact: We can crawl dynamic URLs and interpret the different parameters. We might have problems crawling and ranking your dynamic URLs if you try to make your urls look static and in the process hide parameters which offer the Googlebot valuable information. One recommendation is to avoid reformatting a dynamic URL to make it look static. It's always advisable to use static content with static URLs as much as possible, but in cases where you decide to use dynamic content, you should give us the possibility to analyze your URL structure and not remove information by hiding parameters and making them look static.

Myth: “Dynamic URLs are okay if you use fewer than three parameters.”
Fact: There is no limit on the number of parameters, but a good rule of thumb would be to keep your URLs short (this applies to all URLs, whether static or dynamic). You may be able to remove some parameters which aren't essential for Googlebot and offer your users a nice looking dynamic URL. If you are not able to figure out which parameters to remove, we'd advise you to serve us all the parameters in your dynamic URL and our system will figure out which ones do not matter. Hiding your parameters keeps us from analyzing your URLs properly and we won't be able to recognize the parameters as such, which could cause a loss of valuable information.

Following are some questions we thought you might have at this point.

Does that mean I should avoid rewriting dynamic URLs at all?
That's our recommendation, unless your rewrites are limited to removing unnecessary parameters, or you are very diligent in removing all parameters that could cause problems. If you transform your dynamic URL to make it look static you should be aware that we might not be able to interpret the information correctly in all cases. If you want to serve a static equivalent of your site, you might want to consider transforming the underlying content by serving a replacement which is truly static. One example would be to generate files for all the paths and make them accessible somewhere on your site. However, if you're using URL rewriting (rather than making a copy of the content) to produce static-looking URLs from a dynamic site, you could be doing harm rather than good. Feel free to serve us your standard dynamic URL and we will automatically find the parameters which are unnecessary.

Should you try to make your dynamic URLs look static?
Following are some key points you should keep in mind while dealing with dynamic URLs:

1. It's quite hard to correctly create and maintain rewrites that change dynamic URLs to static-looking URLs.
2. It's much safer to serve us the original dynamic URL and let us handle the problem of detecting and avoiding problematic parameters.
3. If you want to rewrite your URL, please remove unnecessary parameters while maintaining a dynamic-looking URL.

If you want to serve a static URL instead of a dynamic URL you should create a static equivalent of your content.

So what's the point of all this?

Unless you have a site producing large dynamic URL's you have nothing to worry about.  Don't go turning off Permalinks in wordpress or stop using Mod-rewrite because Google can now index dynamic URL's a bit better.

Btw, here's the link to the full article over at the Google Webmaster blog