You can search Blogdigger Local by entering a city/state or Zip Code along with your search terms. This initial beta release only supports about 50,000 US cities and zip codes but expect support for more locations soon. If you're interested in seeing what's being said outside the U.S., Greg suggests entering the latitude and longitude on the advanced interface (coming soon).
Results can be sorted by date or relevance. Result pages also include a link to a map of the location and a list of other local blogs. It's also possible to create an RSS feed for your Blogdigger Local search strategy.
According to the FAQ, Blogdigger is using a "number of methods" to determine a blogs location.
The best way is to support the ICBM or geoPosition meta data specification which defines your site's latitude/longitude as an HTML metatag. More information can be found at GeoURL.
If and when more bloggers begin including GeoURL info in their blog's metadata, Blogdigger Local and similar services will become more and more useful.
More about Blogdigger Local and local advertising opportunities here.