Here why:
1. even though the toolbar is used by several million people, which is impressive, the sample of users is not very representative of all those who use the web. Those with the toolbar installed are more likey to be more technically orientated, so the Alexa ranking will be biased in the direction of higher ranking of the sites that those who are more technically orientated would visit. Any statistician will tell you that a small random sample of all users would yield more accurate results.
2. webmasters who track changes in their own traffic and the changes in Alexa ranking usually find no relationship between the changes, often with the Alexa ranking improving and traffic going down (or the opposite).
3. it is easy to manipulate the rankings. Just installing the toolbar will improve a webmasters own rankings on their own site as they will most likely be visiting their own site more often. Just visiting your own site and clicking on some deeper links into the site several times day would generally be enough to get a site to a ranking of less than 100 000. If its done from a couple of IP addresses, several times a day, then a ranking of less than 60000-70000 is not difficult to achieve.
4. software is now available that simulates visits to a site from multiple IP address to manipulate the ranking. There are also networks of real people that can be jonied where they all visit each others sites with the toolbar installed.
5. despite the above, many claim that this results in inaccuracies in the data, but its not possible to manipulate the results in the top 1000. Here an eg why its not: Take Ken Envoy's SiteBuildIt organization - they are huge fans of Alexa (...that says lot :-) and actively encourge their SiteBuildIt users (1000's) to install it. They boast on their site how well users of SiteBuildIt are doing on Alexa etc etc
Here is an eg where they gloat over Alexa rankings:
http://results.sitesell.com/
Obviously the site owners have the toolbar installed --> which is why they rank well on Alexa!!!
As a result most SiteBuildIt users probably have the tool bar installed ---- guess which site they all probably visit often? The SiteBuildIt site!! - so guess what happens to that sites Alexa ranking.....
They have an Alexa ranking of <200 and gloat about it here
http://buildit.sitesell.com/main/home.html - claiming they get more visits than IBM and American Express - ---- absolute rubbish - they are just getting more visits from those with the Alexa tool bar installed (their users, especially repeated visits) and showing how easy it is to manipulate Alexa data - even in the top 500.
