If your name is Suze Orman and Oprah Winfrey helps you promote, the answer is "yes", free does indeed sell. As David Rothman points out in this PW article, Orman's Women & Money title is doing phenomenally well since the limited-time free e-version was announced last week (it's currently #4 for all books on Amazon).
Skeptics will point out that the reason this one-year old title is enjoying a resurgence has to do with Winfrey and not the free e-book. While it's hard to separate the two factors (Winfrey/free e-book) I strongly believe one without the other wouldn't have produced the same results. But since most of us will never benefit from an Oprah Winfrey PR blitz we should probably figure out how to leverage free content instead.
My gut tells me most books would benefit from content giveaways like this and that the paying customer upside would far outweigh all the freeloader cannibalization downside. That's why I'm so intrigued with the model Smashwords is proposing for their e-content business; free sampling of up to 99% of the book's contents means the financial risk for the reader is almost zero (unless that last 1% is really disappointing!).