Redirect Disaster - Need Advice

So here's the situation:
We had tens of thousands of pages indexed in Google for various terms and our SEO was doing great. We had been atop the search results for probably 4 or more years... until yesterday...

The System Background (for those of you who are technical):
Mywebsite.com was setup as an alias of www.mywebsite.com. After running a websitegrader.com report, it suggested that we 301 redirect mywebsite.com to www.mywebsite.com. We edited the records on our server to do this last Thursday at around 3 PM. This is the ONLY SEO related change we have made in the last month.

The Google Background:
Our last crawl according to Google Webmaster Tools was 2 hours before we changed from an alias to a redirect (1:15 PM no Thursday). As of that time, we had 135,000 pages indexed on mywebsite.com and 3,050 indexed for www.mywebsite.com.

The Outcome:
After redirecting, 7 days later nearly ALL of our pages had disappeared from the index. They are no longer even appearing in the top 1,000 results. Our search engine traffic has decreased by around 40% from Google, although no other search engines have been affected.

What I Need From You Guys:
Help... obviously. I am wondering if anyone has encountered this problem before. If so, how can we fix this? Am I better off to leave the site redirect in place or return it to its previous alias setup? How long does it usually take to recover from this hit? Is recrawling all that is needed to fix this problem?

have you run the website through fiddler to see what the status comes back as? Make sure this is a 301 redirect.
http://www.fiddlertool.com/fiddler/version.asp

Also can i ask when you were ranking: when your page came up in the rankings was the link underneath yourwebsite.com/car-insurance/ or was it www.yourwebsite.com/car-insurance/

If it was the 1st one it could be that google had considered the non www versions the most authoritive and it would not take long for google to then switch them over to the www versions.

Seomonkey,
Thanks for the help. I have run the site through Fiddler and it is displaying that there is a 301 in place for mywebsite.com:

RESPONSE CODES
--------------
HTTP/301: 1

As for your question about the page which were ranking, the majority of the pages were ranking under the mywebsite.com/file (135,000 pages) and there were only a small fraction of these pages (3,050) ranking under the www.mywebsite.com/file setup.

I am hoping that you are right and that it was just an authority issue, but if you have any other advice I would greatly appreciate it.

Thanks

To be honest that is the only thing i can think off. I would think that once these redirects kick in properly you should see a jump in traffic as they may come back even stronger. I think you should have researched more which one would be more beneficial to you at the time... i would rather lose 3k webpages from the index for a couple of weeks then 135k webpages from the index for a couple of weeks.

I agree, but from everything that I read I could not find anyone saying that converting an alias to a 301 would affect traffic at all. Theoretically they are the same thing, but obviously for Google that is not the case.

Next time I think I will just leave it alone until we have a problem.

Well that would depend on where you get your traffic... doing a 301 can get your page pulled from the rankings in google for a short period of time until they figure out what has happened. And then the new page comes in... If your only traffic source was google then its obvious theres a chance you could indeed lose traffic.

What is the usual amount of time that the results are depressed in the rankings? I know it will not be a definite amount of time, just trying to figure out if I am looking at days, weeks, months?

I can't confirm this firsthand, but please see fathom's post on this thread, last one on the first page: http://forums.seochat.com/seo-test-and-experimentation-81/keywords-in-urls-how-important-188095.html?pp=15

What is it set to in Google's Webmaster Console?

Under: Tools: Set preferred domain

If you did a 301 server side to www. and it was previously set to no-www in Google - while I would think Google is smart enough not to say "no pages"... but maybe not.

Just wanted to let you guys know that the ranking have returned, and our organic traffic from Google has actually increased about 20%. Hopefully this is a long-term increase and not just a temporary blip.

So it sorted out which was the best url? are your results now coming up with www.yourdomain.com under your snippet instead of yourdomain.com? If so it was just while they got their data in check from your website.