"While we're not the first news site to aggregate local news, we're doing it a bit differently -- we're able to create a local section for any city, state or country in the world and include thousands of sources. We're not simply looking at the byline or the source, but instead we analyze every word in every story to understand what location the news is about and where the source is located," mentions Google News Blog.
You can create as many local sections as you want by clicking on "Edit this personalized page" and selecting "Add a local section". It would be nice if Google News adds the layout options from iGoogle and makes it easier to rearrange the sections and add new content. Google could also display a lot of interesting content about a location (popular videos, photos, blog posts, events, community maps) in a special iGoogle tab.