Should a 3'-4' retaining wall have interlocking blocks?
without a lip you'd want to use concrete adhesive on each row.

check your local code regulations. Typically a wall of a certain height has to be run through an engineer first. In my area I believe the height was 3'. Anything higher I'd have to hire an engineer.

In our case, we had a large amount of earth to retain, but decided it was best to use a tiered approach building two 3' walls with a 8' set back between each. 

In either case, go with the largest blocks you can use. The larger the block, the heavier the block, the sturdier the wall, and the better it will hold back whatever is behind it.