I've seen this skill interpreted both ways, so I don't believe that there is an approved official ruling for it, but to me, it never made much sense to restricting Knowledge (local) to one particular locality.
Sure, on the surface it seems a little overly broad to have some local knowledge of the legends, personalities, laws, and traditions of every region, but is this really much broader than knowledge (planes) giving you knowledge of the inner workings of every single plane of existence? When you stop and think about it, there are a lot of planes, and Knowledge (planes) should give you geography, history, local, nobility, and arcane equivalent knowledge for each and every one of them. Similarly, Knowledge (history) gives your character familiarity with not only the equivalent of North American history (or wherever your local region might be), but also whatever the equivalent in your campaign world is for European History, Chinese Dynasties, the Russian Tzars, Zulu conquests, Aztec traditions, Pacific Island empires, Antarctic pyramid construction, ect. Since each of these could basically be its own college major (well, maybe not the antarctic one...), I personally think that Knowledge (history) is about as broad a topic as Knowledge (local) which would be the equivalent of some regional IR classes.
Finally, since Knowledge (local) is the skill used to identify humanoids, it never made much sense to me to be able to identify an orc in your home region, but have zero chance whatsoever of identifying the exact same orc in the neighboring county. (And I'm not talking a different flavor of mountain orc, but rather the exact same breed/race/clan of orc.) This is because knowledge is a trained class skill, so if "local" is limited to one area, then you can not ID any humanoids in any area that is not your home area. This strikes me as silly, but it would be the mechanical result of an interpretation that limits Knowledge (local) to your home region.
That's my logic as to why I use Knowledge (local) in its broad form, but I realize that the rules leave it up for debate and that the skill is frequently ruled to function either way.