Is hosting the site in the country still applicable? The notion has been around for as long as I've been in SEO and a lot has changed since then - many more businesses reselling hosting packages that use foriegn servers. Isn't it fairly common for a good selection of UK sites to be hosted in the US (for example)?
I transfered a .co.uk which was hosted in the US (UK company) to a UK based hosting service last year. No real movement in rankings to speak of.