Drop in rankings (for one or the other reason is common and it is terrible if you're not able to recover it normally.
I often get inquiries to recover penalized sites. So here are some tips that actually work and our team has recovered many penalized websites' rankings and dropped rankings for any other reasons.
1- Have a deeper look at your links using yahoo explorer. And you must closely check your recent links build in last 2 months. Remove any bad links or broken or links from non-niche sites.
2- Remove links from blogrolls (if your site is penalized with -50 or over filters) And you MUST remove blogrolls inbound links if your site is a static site. Reason? - Check your yahoo explorer and you will find links coming from same blog as and when the blog is updated. If your site is static, it may not be able to handle the association with such "link spamming". If the site under question is a blog, then too, remove any blogroll links for some time. It could be a debatable point but I've tested it many times.
3- Add least 50-100 or more words to all the existing pages of your site. In simple words, update your web content.
4- Change the meta-tags a little. Just for the sake of change.
5- Now most important job,
A - Get links from active, old, running and niche relevant sites. 5 good links build over 10 days would be enough. Don' use exact keyword; rather use company/site name and link it with url. Or you can do something like this for a keyword as example - keyword is car insurance - Now get the link with anchor text "Exciting car insurance offers at "site name" instead of "car insurance".
B - Get signature links from forums like DP, NB, WF, adobe or other niche related active forums. Just make sure you get these sig links from active users and use variable anchor text. 2 links from 5 different forums would be enough.
C - Don't work on any blog comments links or linkwheels of web 2.0 or contextual blogs from networks when you're trying to recover your dropped rankings.
D - Get a Hub done by a regular hubber with 80+ hubscore.
E - Get one Squidoo lens done
F - Try to get at least 2 .edu links
Keep promoting your website with either your company or site name or long anchor text.
You'll start an amazing improvement in rankings within 15 days even if you've been trying to recover it for last 2-3 months.
Hope this helps the business owners trying to deal with the issue.
P.S - I'd be updating this thread or post with more stuff if I find anytime. And would welcome any suggestions and tips if you have.