Erik Tenkar posted about this, and just about every other cool kid did, too.
My thoughts on this are simple: Innovate either system and setting and you'll get innovation in both.
If you innovate in a system, you will naturally have spill-on effects that influence the setting. Decisions you make about spellcasting, about technology, about character power, about style of play will all spill over into the setting. D&D settings generally have dungeons and dragons in them for a reason.
If you innovate in a setting, you will naturally have some influence on the rules. After all, you need rules or guidelines and system support to keep the magic zeppelins in the air, have dog-men aliens, deal with the ray guns or meson cannons, and so on. An innovative setting will always have some influence on the rules used to play in that setting.
You don't have to consciously do both. You can innovate in one, and petty much just work with what exists for the other part. But if your setting is innovative, it will cause system innovation, and vice versa. Even an homage to another system's basic setting will be influence by the new system, and an existing rules system will be warped by an innovative setting that needs more than that system provides. Only stale retreads will fail to innovate in either. Those stale retreads might still be fun, of course, but I don't think when you think "innovation" you really need to worry about either/or.