Yahoo has launched Yahoo News for local area news. The product is still only a beta but is offered from the Yahoo News area. It allows users to select a city and then aggregates local news from a number of mainstream media sources from the local area. Since I am in Chicago this is the page that I see. Unfortunately the beta does not yet offer syndication feeds (RSS or Atom) of the local area content. I am hoping that feeds are added soon.
The Yahoo local news aggregator is ultimately just another bell or whistle to add to Yahoo News product. However, I currently think Topix.net offers a better local news aggregation service since it pulls from more sources, offers syndication feeds for any local area and offers local news content of just about every US zip code.