Yeah cutmeiser, they definitely can. Most ISPs have IPs that are city specific. In fact, my ISP which covers the whole of England indicates my town in the hostmask, which is just a small place near Nottingham.
There's no tracking cookies involved as all it's doing is looking at your IP and comparing it to a database of which IPs match which towns. Someone could feasibly put an image of the sort in their signature and it'd work just the same.