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(edited by: heini at 10:18 am (utc) on May 15, 2002)
Generally the most important point in localizing is language, not so much the TLD. Almost all major search engines will classify a site from automatic language recognition.
Nevertheless some engines, like AV, do classify for TLDs.
Local TLDs are however important for submissions to local directories.
Another point is this: if you decide to buy a local domain, you have the chance to get your keywords in the domain name in the local language.
Plus a domain name in the local language often sticks better with the users.
So all in all: a generic local domain is by far the better choice.