The rel=nofollow attribute is used on links to instruct search engines not to follow the link. Initially this attribute was used at the page level through a meta tag but this approach was unwieldy and difficult to implement. Replacing the page level meta attribute by an attribute that can be applied at the page level gave page owners a good deal more control of the crawl.

The rel=nofollow links is applied as follows:

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In the absence of a nofollow attribute, the default is dofollow.

The PageRank of the parent page is not transferred to linked pages that are assigned the nofollow attribute. However, Googles approach to PageRank is to ensure that rank still is 'lost' to the nofollow pages so that the the target pages do not get a disproportionate allocation of the outgoing PageRank (in other words, there is no benefit to the dofollows by having more nofollows).

PageRank Sculpting is achieved through the use of the rel='nofollow' link.

More on this from Google.

Google honors the no-follow directive and does not follow links marked rel=nofollow (see the experiment).