[Jayant]

The first for loop can cause performance issue: Suppose Trigger.New has 1000 or 2000 records then it will run for 1000*1000 = 1,000,000 or 2000*2000 = 2,000,000.

You can use Set here for improving performance:

Integer counter = 0;
Set<String> uniqueEmails = new Set<String>();
List<Contact> validContacts = new List<Contact>();
Map<String, Contact> validContacts = new Map<String,Contact>();
for(Contact conToInsert : Trigger.New) {
if(conToInsert.Email != null) {
Contact result = validContacts.get(conToInsert.Email)
//If result is FALSE, then add Error to record.
if(result != null) {
conToInsert.addError("Duplicate Email Address.");
}
else if(result != null && conToInsert.Type__c == ‘Type 4’){
conToInsert.addError("Contact Cannot be Type 4.");
} else {
//Everything okay

validContacts.put(conToInsert.Email, result );
}
}
}

//Now check Contact with unique email against existing Contacts.
//If there are more than 50000 Record, then this needs to be rewritten
List<Contact> existingContacts = [select Email,Type__c from Contact Email in :validContacts.keySet()];

for(Contact existingContact : existingContacts){
Contact temp = validContacts.get(existingContact.Email);
if(temp.id == null || temp.Type__c == ‘Type 4’) {
//This is bad record, remove
temp.addError("Duplicate Email or Type 4");
validContacts.remove(temp);
}
}

//These are valid record. Do whatever you want to do with them.
List<Contact> updateOrInsertContact = validContacts.values();

I hope this helps.