What is the latest iOS version for iPhone 4?
The latest iOS available for the iPhone 4 is iOS 7.1.2

Have a look at: Maximum Supported iOS Version

The direct download links for the full releases are:

iPhone 4 (GSM Rev A)

iPhone 4 (GSM)

iPhone 4 (CDMA)

Download the appropriate file for your device and then in iTunes select the device and option-click the Check for Update button and select the downloaded .ipsw file.

Also, if you Google "how to install ios from file using itunes" (without quotes) you'll find additional information.