This question keeps arising and for me at the time of writing this the answer can be explained in this following article. The reason this question has been raised again is because Google has removed its recommendation to submit to directories from its webmasters guidelines.
However I don't think this means that the search engine will stop taking directories links into account. It just feels that it doesn't need to recommend this tactic anymore. This does sound a bit confusing and you have to ask why Google has removed this information, it more than likely that this is a small part of a bigger picture which Google is working on. Google is not likely to tell us what this is and as usual we will have to work it out for ourselves.
I do think however that there are changes going on in the search engine result pages I will describe a few of the most recent ones below. With some search terms more informational websites seems to be showing up as Google thinks a higher percentage of people may be looking for information on a subject rather than to be faced will a list of companies.
Although Pagerank is irrelevant when it comes to SEO it seems to be having an even more less of an impact these days.
Lets get back to the subject of directories the good thing about directories is that they are good for co-citation. This means that what your website is associated with. For example if you had a link to your website on a page with lots of other links to, let's say link directories then Google may think your website is related to that industry. If you want to check what your co-citation is just click the similar pages link next to your listings in the search engine results pages.
For a good web directory I would check this one out. It also has a great SEO forum owned by some SEO experts who are on hand to answer any questions.
So to answer the question at the top of the article are directories still a good form of linking building? and at the time of writing this article I would say yes, however I'm sure people would disagree. This may change and in the end only time will tell. I can however prove that this still works as I have seen it work on many websites and even on my own. Just remember to make sure you are submitting to good quality directories like the one above and don't just submit to any old directory.
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Jack Mack
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