Anchor text dilution with internal links

Background: Months back I managed to over-optimise and evoke an algorithmic penalty on one of my sites by going gung-ho with my internal anchor text linking. I used the main keyword on almost every page that I'd created for the site and within 4 -5 days I dropped 4 pages (from page 1 to page 5) where I hovered and occasional disappeared altogether. After changing the anchor text of the offending links, my site made a full recovery within 2 weeks which got me thinking, can external anchor text be diluted internally or are there two separate systems?

My question is this: Has anyone ever tried overall anchor text dilution by mass creating internal links or is there a two tiered system? There's very little info out there on this from my research.