Auto-reload behavior disappeared from development mode in Sinatra 0.9.2. rtomayko has created a tool called shotgun (http://github.com/rtomayko/shotgun) that fires an instance of mongrel (thin, webrick, whatever) and brokers the connection, grabbing the files live every time.
sudo gem install shotgun
then
shotgun shorten.rb
supposedly gets you going, but I had to do it like this on Snow Leopard, to combat a Mongrel “initialize_without_backlog” SocketError:
shotgun -o 0.0.0.0 -p 4567 shorten.rb