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It has been long suspected in webmaster circles that Google et al takes server location into consideration when providing accurate search results. i.e. If a user in America searches for a term a search engine will consider an American site as more relevant than say, a UK site with the same content.
How does a search engine know where the server is located? Well there are two aspects to this. A site with for example a .co.uk extension is likely to be targeting UK visitors. A .com is first and foremost an American top level domain extension.
Secondly, a search engine has the website's IP address and can easily look up which country block the IP belongs to.
Thus using our example, a .com address hosted in America is unlikely to perform well on UK targeted searches or searches by UK visitors. A .co.uk address hosted in the UK will perform better than the above.
Of course, there is also the latency issue to consider when deciding where to host your website. UK visitors connecting to a UK server can expect a response time of anything up to 50ms, whilst UK visitors connecting to an American site can expect a response time of anything up to 300ms.
Be careful then, when signing up with hosting providers who claim they are in the UK (or your own country of course) but actually have their physical hosting presence in another country. Without wishing to pick on any particular provider the most obvious one here is 1and1. Their site is UK but their datacentre and IP range is German.