I would say that whether to host the blog separately or as part of the existing site is more of a business decision than an SEO question. As Shane points out, you can link to another domain as easily as you can link to a subdirectory. My own company's "site" is actually made up of two domains and a subdomain, all divided up into numerous subdirectories. All the pages interlink as one would naturally do for pages within a single site.
The one advantage I can see is that the SE's -- because they rank pages, not sites -- treat each domain/subdomain as a separate entity. Which means that I can think of one key word where we have six of the top ten positions (two from each of the three "elements" of our site) when, had everything been on a single domain, we would only have gotten two.
This is even though, in real life, they're all a single site and we've never tried to make anyone think otherwise. If the SE's wise up tomorrow and start counting them all as pages from a single site, I won't be weeping, because that's really what they are. In the meantime, I'm not complaining.

The reason they're split up the way they are was strictly a business and technical decision, driven by considerations that had nothing to do with SEO. In fact, most of the decision-making was done before I even came on board, by people who knew nothing about SEO at all. This was the best way to organize our site for our internal business operations.
Just so, the decision of whether to host the blog on your existing domain or start a separate one should be based on what's best for your business. If you want the blog to be the "official" company blog, with a corporate "tone of voice," and you plan to keep fairly tight control over not only posts, but comments as well... I'd say it would be better to host the blog on your current domain.
If you want the blog to be more casual, a "let your hair down" kind of place where customers and prospects can get a more lighthearted look "behind the scenes" (or something along those lines), then hosting somewhere other than your primary domain might be a better idea. Of course, if your "corporate tone"
is lighthearted and casual, then we could be back to hosting it on the existing domain.

It might even be an interesting idea in that case to take a page from the playbooks of companies like Google and Yahoo, and allow/encourage key employees to start "personal" blogs where they can discuss industry trends and company-related news in a relaxed and personal atmosphere. As we've seen with some of those blogs, lots of people like the idea that they're getting "insider info" and those blogs get a lot of readership. Depending on your business and the sorts of information you include in the blog, this might be a powerful draw.
Of course, the success of this would depend on (1) the kind of business you're in, (2) the ability of key employees to write interesting, coherent posts and (3) the willingness of said employees to keep up with regular postings.

To my mind, it really all comes down to what makes the most sense for the business, which will depend almost entirely on what kind of business you're in, what use you plan to make of the blog, what resources you have available to you, and what you think your customers and prospects would find the most useful/interesting.
SEO is at best a minor consideration -- and since there are things to be said in favor of either arrangement from an SEO standpoint, in a practical sense it becomes a non-issue in the final analysis, IMO.
--Torka