A lot of this will be presented at RailsConf tomorrow.
Ribrdb, is a googler who works on AppEngine, and has written Ruby wrappers for a a number of the pieces of the Java AppEngine API. You can find his work at http://code.google.com/p/appengine-jruby/
I'm working on some integration & environmental tools for developing locally w/ the AppEngine called Reggae (which i won't link since i don't have anything compelling to show yet).
It does raise the question of what it means to call something a 'Rails app', especially if AR is considered the heart of Rails.
Also, given the restrictions imposed by GAE, Rails may not even be a good choice. Sinatra or Innate/Ramaze (once jruby-rack pulls in Rack 1.0 code) seem much better options, being cleaner and lighter.
So even though there are limitations (e.g., single thread), the following languages can run on App Engine through the Java back door: PHP, Clojure, Groovy, JavaScript, Python, Ruby, Scala, Scheme, Beanshell, ...
And this is a big deal because while Rails might run on JRuby (even outside of Google App Engine) not many people do in practice because the various libraries and gems haven't caught up yet.
Thanks to JRuby-Rack you can run any rack compliant application framework on Google App Engine (sinatra, merb, rails).
However, ActiveRecord (Rails modelling component) can't actually interface with the Google App Engine datastore directly.
There are tools that have been built by some guys at google to wrap the Java API, but i don't see these instructions including them.