<<Location has become an important part of the way we search. If you're a foodie looking for restaurant details, food blogs or the closest farmer's market, location can be vital to helping you find the right information. Starting today, we've added the ability to refine your searches with the "Nearby" tool in the Search Options panel. One of the really helpful things about this tool is that it works geographically — not just with keywords — so you don't have to worry about adding "Minneapolis" to your query and missing webpages that only say "St. Paul" or "Twin Cities." Check it out by doing a search, clicking on "show options" and selecting "Nearby.">>

http://googleblog.blogspot.com/2010/02/refine-your-searches-by-location.html

I noticed the option yesterday, wasn't sure if it was new.
http://blogoscoped.com/forum/168177.html#id168229

It was new 2 days ago in fact ;-)
http://translate.googleusercontent.com/translate_c?hl=fr&sl=fr&tl=en&u=http://twitter.com/Zorgloob/status/9596967777&rurl=translate.google.com&twu=1&usg=ALkJrhivNvcGjZ5EC-RMJox_um4Q7wPP3g
(Google Translate fails for "Nearby", it translates it as "Close")

Didn't work here just now, unless I missed something. I typed [pizza] and a top onebox was asking me for "US city or zip" – I am currently in Stuttgart, Germany. Expanding the search options and clicking Nearby, I get lots of general or US based results – the Dominos homepage etc., nothing from my city. Then I clicked on "Custom location" in the search options and in red, Google printed "Sorry, we couldn't understand . Please try another location"... but I hadn't even entered a location yet! Entering "stuttgart, germany" into that box, the new search result was now still showing general pizza maker homepages (PapaJohns.com etc., I don't think we even have that chain in Stuttgart, not sure)... only down the middle of the page were actual maps results for Stuttgart, though most of them looked like pizza restaurants which don't deliver here.

Just entering [pizza stuttgart] works easier. The first, second and third result (after the Maps onebox) will all be a delivery service from this region.