The iPhone blog reports that the accuracy of the blue circle (more like a blue gunsight-like crosshair to me) was improved by Google. As I figured out, this is Core Location related, because not only will it improve performance on Maps, but also on all other applications using Core Location.
The accuracy gained is quite impressive. If you don't look at the error, the position itself is quite close to your real position (still, it will be really unreliable, leaving you with an accuracy of around 300m).
The improved accuracy maybe great, however, on the downside, your positional information is being sent to Google in some way, wich might leave the possibility for Google to track you whenever you use something that uses Core Location, which does not have to be the builtin Maps application.
I'm not saying that Google will track you but neither do I say the opposite. The thought of being tracked by -doesn't matter who- and also being sure not being able to avoid this by not using "their" application leaves a bad taste in my mouth.
I don't know if it was possible to eavesdrop the traffic that is being sent to Google, but I'll give it a try as soon as possible. Even if, it is uncertain if there will be hints that you are being tracked or not, but I can imagine that you are at least as curious as I am...