Is there any real SEO benefit from simplifying my PHP urls to shorter, neater urls (with mod_rewrite)? I want to do this mostly to make my site look nicer - but if it's good for search engines, then all the better.
Is there any reason NOT to make shorter URLs?
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it all depends. if you mean the following

• http://www.test1.com/12.html
• http://www.test1.com/125.html
• http://www.test1.com/122.html

To be short, that probably is too short.

• http://www.test1.com/area1/index.html
• http://www.test1.com/area2/index.html
• http://www.test1.com/area2/subpage.html

This is also short, but not the shortest possible. The SEO benefit is supposed to be minimal. And things like
http://www.test1.com/free-discount-c...ial-offer.html
Isn't going to much for you.

But pages like http://www.test1.com/index.php?actio...lots&lots=more
is not advised.

it's good to have a proper hierarchical structure to your site,
so if someone is on http://www.test1.com/section4/subsectiont5/offer53.html and they delete the offer53 or other part of the url that they can navigate back by themselves.

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