Matt Cutts answers this commonly asked question in the following video, recorded on April 23, 2009.

Web servers can be located in any given country in the world. In most cases, a person living in a particular country will only want to reach those in his or her immediate geographical area. However, there are many webmaster who want to target an international audience. Those who are targeting potential customers both inside and outside of their home country will naturally want to know if web server location has a bearing on search engine results.

Mat Cutts confirms that a web server based in the country you are targetting does help however there are a lot of other factors that should be considered like the tld of the domain name (ie , etc)