I thought Google's motto was "do no evil".

This certainly doesn't qualify.  I have been uninstalling the Google toolbar from all my systems for the past few months, and now I guess that was a Good Thing to do ...

Sunbelt Blog: Google Toolbar tracks searches after it’s disabled.

Ben Edelman, Harvard privacy researcher and guru has revisited the features of Google Toolbar and was appalled to discover that disabling it doesn’t really disable it. He is recommending that all users uninstall it.

In a long, thorough and well-written piece on his blog Edelman discusses how he monitored the Toolbar’s behavior with a network sniffer and documented the transmission of data back to Google (to toolbarqueries.google.com). Not only does it track a user’s Google searches, but it also phones home information about searches done in other search engines.

And, the privacy policy, he says, is ill-conceived.

“Notice that the Privacy Policy loads in an unusual window with no browser chrome – no Edit-Find option to let a user search for words of particular interest, no Edit-Select All and Edit-Copy option to let a user copy text to another program for further review, no Save or Print options to let a user preserve the file. Had Google used a standard browser window, all these features would have been available, but by designing this nonstandard window, Google creates all these limitations.”

This, of course, prevents a user from using an application like EULAlyzer that points out areas of concern in end user licensing agreements and privacy statements.

Update Wed 27 Jan 2010 06:49: Ars Technica reports that restarting the browser stops the behavior, and Google is fixing the problem anyway.
Google: Toolbar data persistence a bug, fix available

We asked Google for comment, and a spokesperson told us there's a simpler solution: quit and relaunch the browser. That apparently gets the software to reload its preferences, and will put a stop to the transmission of URL data.

"It affects those using Google Toolbar versions 6.3.911.1819 through 6.4.1311.42 in Internet Explorer," the spokesperson told Ars. "Once the user restarts the browser, the issue is no longer present. A fix that doesn't require a browser restart is now available on [our site] and in an automatic update to Google Toolbar that we are starting tomorrow." The rapid response—Edelmen's report is dated today—suggests that Google was already aware of the problem and had put the fix through Q&A.