Set the title of the terminal window to the current directory

Depends on your shell.

This article displays multiple methods.

I personally use zsh which has a convenient precmd() function which is run before each prompt.

    precmd () { print -Pn "\e]2;%n@%M | %~\a" } # title bar prompt

Although the other questions list bash methods, they alias cd. Bash provides an inherent method that chains off just the prompt.

bash

bash supplies a variable PROMPT_COMMAND which contains a command to execute before the prompt. This example (inserted in ~/.bashrc) sets the title to "username@hostname: directory":

 PROMPT_COMMAND='echo -ne "\033]0;${USER}@${HOSTNAME}: ${PWD}\007"'

where \033 is the character code for ESC, and \007 for BEL. Note that the quoting is important here: variables are expanded in "...", and not expanded in '...'. So PROMPT_COMMAND is set to an unexpanded value, but the variables inside "..." are expanded when PROMPT_COMMAND is used.

However, PWD produces the full directory path. If we want to use the '~' shorthand we need to embed the escape string in the prompt, which allows us to take advantage of the following prompt expansions provided by the shell:

\u          expands to $USERNAME
\h          expands to hostname up to first '.'
\w          expands to directory, replacing $HOME with '~'
\[...\]     embeds a sequence of non-printing characters

Thus, the following produces a prompt of "bash$ ", and an xterm title of "username@hostname: directory" ...

 case $TERM in
     xterm*)
        PS1="\[\033]0;\u@\h: \w\007\]bash\$ "
        ;;
     *)
        PS1="bash\$ "
        ;;
 esac

Note the use of [...], which tells bash to ignore the non-printing control characters when calculating the width of the prompt. Otherwise line editing commands get confused while placing the cursor.

Copy & paste into file ~/.profile:
PROMPT_COMMAND="echo -ne \"\033]0;${PWD##*/}\007\"; $PROMPT_COMMAND"

This will set the title of the current terminal tab to the name of the folder you are in (NOT the whole path).
So...
Developer/Applications/Utilities/Bluetooth/ becomes => Bluetooth

As of Mac OS X Lion 10.7, Terminal has an explicit escape sequence for setting the working directory, which Terminal displays using the standard window "proxy" icon. This enables you to Command-Click it to see the path, reveal in Finder, or drag it like any other folder. In addition, Terminal can use this to create another terminal at the same directory, and to restore the working directory when quitting/restarting Terminal (when Resume is enabled). It also enables restoring directories for Window Groups.

It's the same Operating System Command (OSC) escape sequence as for the window and tab titles, but with the first parameter set to 7. The value should be a "file:" URL, which enables percent-encoding special characters so it can handle all valid pathnames. You should also include the hostname so Terminal can determine whether it's a local directory; Terminal will avoid using it as the current working directory if it's from a different host.

On a related note, Terminal similarly supports setting the "represented file" using the OSC escape sequence with a parameter of 6. If set, the proxy icon will display this instead of the working directory. For example, I have emacs and less configured to reflect the currently displayed file/buffer in the proxy icon. This enables these tty-based programs to be more integrated with the surrounding OS.

The working directory behaviors are enabled by default for bash (the default shell on Mac OS X). See /etc/bashrc for the relevant code.

It's also probably worth mentioning that Lion Terminal now supports setting the tab title independently from the window title using the OSC escape sequence.