From the October Google Webmaster Chat Q &A:

Jane, Ireland: Does the geotargeting feature in Webmaster tools hold as much weight as having a country-specific TLD?

Kaspar aka Guglarz: Hi Jane!
Google uses a bunch of signals like location of the server or the TLD in order to determine which users might be interested in the sites content. Geotargeting is a way for webmasters who use non country specific TLD's like .net/ to tell Google which your target group was, if the site is specifically targeted to users from a particular area. Think of the site of a small, local hardware store or a vet for example. Potentially, their main target users would be people living in the nearby area. Geotargeting is not to be used for language targeting though.

[Post-chat edit: Using the tool may have some effect on non-country-restricted searches, but it probably won't be the same as having the country-specific TLD. Most sites will see results somewhere between the two extremes (no effect, and total equivalence with ccTLDs). 

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