This makes me think: what should Google do to recover from this? People are angry, they feel violated and betrayed. It's a public relations disaster. My opinion is that Google needs to draw a line under this whole issue. They need to hold up their hands say "you know what, we didn't realize what we were doing here but we get it now, this was wrong, we're sorry." And within hours of making that statement, pull the who…
Based on their first post on the blog, it looks like they chose the "duck in the sand" approach, classic PR non-speak: ignore the issue, sidetrack it, ridicule it. That's what 99.9% of corporations will do.
Again, they have another 24 hours to do something completely different and acknowledge the problem head-on. It will hurt for a week, but they'll be much better off long-term. Will they have the class and the guts to go for it? I hope so, but I'm not holding my breath.