As a peer reviewer, I've sent papers back with comments along the lines of "this work seems quite similar to the published work of X in the following papers (which the author doesn't cite): ... I wonder if he if the author is aware of this earlier work", and subsequently heard nothing more (presumably because, upon looking at said papers, the author came to the conclusion that he had not in fact discovered anything new). On the opposite side of the coin, one of my papers benefited from very similar comments, in that having related work brought to my attention allowed me to revise my paper to better describe how it fit with the rest of the field.

I think it's in cases like this -- where peer reviewers point out things (whether other research, or possible errors) of which the author(s) do not seem to be aware -- that peer review really shines. If reviewers respond merely with a 'yea' or 'nay' they're not doing their job properly; their job is to review, not to judge.