Introversion software, the makers of the games Defcon, Uplink and Darwinia (among others) have started working on a game about a year ago which extensively uses PCG for city generation, here is a video of their work, and you can read more about it on the development diary of the game (start from the first part at the bottom of the page!).
This immediately got me extremely interested, and seeing the potential for games I immediately started researching the technology. I have amassed a folder of 18 PDFs about the subject (research papers, SIGGRAPH presentations, etc). Here, I uploaded it for you.
The main approach is to use L-Systems, however, I never got around to understanding enough of that to make something out of this. I tried other, less successful approaches like using Voronois, recursively splitting a rectangular area into more smaller areas and shifting the boundaries a little to obtain a bit of randomness and polygon division.
The last method I had gotten from Mike's Code Blog's posts (here and here). The screenshots shown on his blog make me drool, it is my biggest programmer's dream to ever get something that looks like that. I emailed him to ask how he did it, and here is the relevant part of his reply, I'm sure he wouldn't mind me posting this here:
L-Systems is definitely one way to go, but that isn't what I'm doing. The basis of my method is polygon subdivision. I start with a simple polygon that represents the entire area of the city. Then, I split it (roughly) in half, and then split those two polygons, etc. until I get down to city-block size. At that point, the edges of all my polygons represent roads. I then use the same subdivision method to break the blocks down into building-size lots.
The devil is in the details, of course, but that is the basic method.
I for one still haven't managed to fully implement a solution of which I'm satisfied of, but it remains one of, if not my single biggest programmer's dream to ever achieve something like this.