Jammit is a Rails plugin and command-line tool that uses this technique, along with MHTML for IE 6 & 7, and compresses JavaScript as well.

http://documentcloud.github.com/jammit/

The big advantage here over spriting is not having to deal with the complexities of trying to jam repeated background patterns into sprites, and having to compute pixel offsets for your CSS rules. You can just write your CSS as you normally would, and have the plugin generate appropriate versions of your stylesheets before deploying.

If you'd like to see a demonstration of the speed difference it can make, here's a page that loads 100 small individual images:

http://jashkenas.s3.amazonaws.com/misc/jammit_example/normal...

And here's the same page, using a single CSS file with data-URIs for all the images.

http://jashkenas.s3.amazonaws.com/misc/jammit_example/jammit...