This is what Adam Lasnik, google employee says:
“How does google distinguish between links that have been bought for advertising and links that have been bought for page rank manipulation? Or does google distinguish between the two?
Yes, we do have a pretty strong ability to discern intent in this area. A site that’s buying links on high-PR sites with *clearly* no interest in or reasonable expectation of actual traffic… it does set off alarm bells. And sometimes it’s rather amusingly blatant (“But Adam… I really do expect thousands of eager targeted visitors to my Icelandic-Cheap-Flights.tv site from that tiny white-on-white text link buried 3 levels deep on PR7 HotGardeningTips4U.info!”)
No system is perfect, and we’re always refining how we interpret intent and how we use this and related information to improve our search results. And not just in the aggregate sense: many of us Googlers are regularly using individuals’ sites mentioned around the Web (including on our own Webmaster Help Google Group) as valuable data points. 
“