As Steve mentioned in his Keynote, the Maps Locate features uses both Cell Tower Triangulation and WiFi hotspot mapping. The WiFi part of it is from a company named Skyhook. They've had their employees "war drive" around hundreds of major cities with WiFi sniffers and GPS receivers recording the exact coordinates of various WiFi signals. They've matched the unique MAC addresses of millions of WiFi spots with exact GPS coordinates.
You can easily test if your iPhone is using WiFi to help locate you. Simply turn off WiFi in the iPhone and try locate again. If the circled area gets much larger and isn't as accurate, there can be little doubt that it used a WiFi spot at your location or near you to make the circled area smaller.
In my case (at home), with WiFi on the iPhone off, the Locate Circle is about 1 mile across and my house is about 2-3 blocks southeast of the center of the circle. Not all that accurate.
When I turn WiFi on, however, the Locate Circle shrinks to just two blocks across and if I drop a Pin in the center of the circle it lands EXACTLY on my house (including landing on the correct side of the street).
I've been using the same home Airport network for 2-3 years. So, obviously, the folks at Skyhook drove past my house and sniffed out is MAC address at some point.
OR... Perhaps Apple, in working with Skyhook, is using THEIR OWN DATABASE of registered Apple Products to match the registered owner's Airport MAC address with the owner's registered street address?
In either case, it will be interesting to see how accurate Locate is when I replace my 3 year old Airport Extreme with the new Time Capsule that I've already ordered!
Mark