Hi,
It's not about 'using 404 pages'. It's about removing the occurence of a 404 page when a product isn't available...
So the answer is yes. It's fine to redirect what was a product page to the main relevant category page if that product is no longer available and you don't plan on restocking in the future.
In fact it's recommended if you want to preserve a large percentage of the link equity the original page has built up, and hopefully provide a good user experience by allowing customers to find alternative products.
The only issue is if you have thousands of products being discontinued, then the amount of 301s can affect the speed of your website. But I've managed redirects for websites with 100s of thousands of products, and 10s of thousands of error pages without any issue.
I'd echo Yossi in saying that it may be worth creating a custom 404 Error Page which helps your users if they encounter it, and also improves your branding - with most eCommerce sites with large inventories, it's inevitable error pages will crop up despite your best efforts.
And I'd echo Nitin in saying that if you might get the product back again, you're better leaving the pages on the site and allowing customers to register their interest when it reappears...