Would an application built using a siverlight 3 or silverlight 4 dll be allowed into the market place?
You will have to download the CTP version of the Windows Phone 7 tools (available Sept 16th) and compile your app with those for your WP7 app to be accepted into the marketplace.
It's not a matter of being "allowed", it is a matter of "will it work"? Read the details on what they expect of an app and how it works, and if they don't say you can't do what you suggest, then assuming it actually works, it should be acceptable in the marketplace.
Keep in mind that the version of Silverlight running on the release version of WP7 will not be the equivalent of SL v4. I would be surprised if a v4 DLL would work in WP7. A MS WP7 team member I heard on a podcast (Hanselminutes, I think) said that SL on WP7 is, like, SL v3.7 or so.
Hi Ilyas,
WP7 is built on Silverlight 3 with some inclusions/exclusions to suit the mobile platform.
You can pull DLLs in provided they make use only of features compatible with the platform.
For a guide to what is supported on the platform, refer to these documents.
Features Supported in Silverlight for Windows Phone
Differences Between Silverlight on Windows and Windows Phone