Mathematica 50 Chars
Nest[Join["0"<>#&/@#,"1"<>#&/@Reverse@#]&,{""},#]&
Thanks to A. Rex for suggestions!
Previous attempts
Here is my attempt in Mathematica (140 characters). I know that it isn't the shortest, but I think it is the easiest to follow if you are familiar with functional programming (though that could be my language bias showing). The addbit function takes an n-bit gray code and returns an n+1 bit gray code using the logic from the wikipedia page.. The make gray code function applies the addbit function in a nested manner to a 1 bit gray code, {{0}, {1}}, until an n-bit version is created. The charactercode function prints just the numbers without the braces and commas that are in the output of the addbit function.
addbit[set_] :=
Join[Map[Prepend[#, 0] &, set], Map[Prepend[#, 1] &, Reverse[set]]]
MakeGray[n_] :=
Map[FromCharacterCode, Nest[addbit, {{0}, {1}}, n - 1] + 48]