Google Toolbar allows spoofing the information presented in the dialog which is being displayed when adding a new Google Toolbar button. This can allow an attacker to convince the users that his button comes from a trusted domain. This button can then be used to download malicious files or conduct phishing attacks (e.g. show a login form of a bank).
Google Toolbar 5 beta for Internet Explorer
Google Toolbar 4 for Internet Explorer
Google Toolbar 4 for Firefox (partially)
Proof of Concept is available.
Workaround / Suggestion
Google have acknowledged this and are already working on a fix.
Until a fixed version is provided, I suggest to avoid adding new buttons to the toolbar.