Will restoring my Iphone to facorty settings erase my data?

I have upgraded my iphone 4s to the new iOS, and then a few days later, tried connecting my device to my PC ( i have the new itunes).It, however, tells me that it can't connect to my iphone and that i should go to 'Preference' and select to 'restore to factory' settings. Will this erase my data and 'degrade' my phone to the previous iOS?

Yes it will erase your data

Yes you must back up first on itunes

Yes it will since the software is suggesting you to do so. You might have skipped something while setting up the iOS. Do it and be careful when setting the iOS.

1. Downgrade to a lower version of iTunes (google iTunes 9.0)

1. Connect your iPhone to the computer.
2. Back up to iTunes.
3. Restore to factory settings
4. Reinstall your newest version of iTunes
5. Restore to factory settings again…