The binary log format as implemented in MySQL 5.1 is
considerably different from that used in previous versions,
especially with regard to handling of character sets,
LOAD DATA INFILE, and time zones.
As a general rule, you should setup replication only between masters and slaves running the same major versions (5.1, 5.0 or 4.1) of MySQL. If you must execute replication between different major versions, ensure that your client is at a version equal to or higher than that of the master. For example, a master of 4.1.23 and a slave of 5.0.24.
Replication works correctly between MySQL 5.0 and 5.1 masters and slaves in any combination, even if the master and slave have different global character set variables, and even if the master and slave have different global time zone variables. (Note that this is not true in cases when the master, slave, or both are running MySQL 4.1 or earlier.)
We recommend using the most recent MySQL version available because replication capabilities are continually being improved. We also recommend using the same version for both the master and the slave. We recommend upgrading masters and slaves running alpha or beta versions to new (production) versions. In many cases, replication from a newer master to an older slave will fail. In general, slaves running MySQL 5.1.x can be used with older masters (even those running MySQL 3.23, 4.0, or 4.1), but not the reverse.
You cannot replicate from a master that uses a newer binary log format to a slave that uses an older format (for example, from MySQL 5.0 to MySQL 4.1.) This has significant implications for upgrading replication servers, as described in Section 6.3.3, “Upgrading a Replication Setup”.
The preceding information pertains to replication compatibility at the protocol level. However, there can be other constraints, such as SQL-level compatibility issues. For example, a 5.1 master cannot replicate to a 5.0 slave if the replicated statements use SQL features available in 5.1 but not in 5.0. These and other issues are discussed in Section 6.3.1, “Replication Features and Issues”.

User Comments
Please read carefully the paragraph about new password algorithm in chapter "Replication Features and Known Problems" - this leads also to problems with the "replication user" while setting up Master with version 4.1.x and Slave with version 4.0.x - solutions can be found at section "A.2.3 Client does not support authentication protocol".
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