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The Oldest version that supports all the functionality your application requires.
For example: Your app needs multitouch? Target version 2.1
My application doesn't need any functionality introduced in newer versions, so I target 1.5
I agree with the answers posted above, and I would add that on the android API reference site, most of the time the minimum API level is specified (http://developer.android.com/reference/android/package-summary.html). You can have a look at this page to identify the Android version associated with a given API level: http://developer.android.com/guide/appendix/api-levels.html