Yes, this question has come up on both the seoroundtable and webmasterworld forums. The general consensus is that Google does a combination of both IP and secondly the domain extension to establish the geographical location of domain. (IP address primary, extension secondary)
It makes sense really to categorise domains geographically for Google, as their main income is derived from adwords, therefore their search algorithm is designed mainly for those who use adwords campaigns and choose a geographical location as to where those adwords are displayed, and this can only be done through an IP address.
.