I was actually looking for this for quite sometime. Some years back in my bashrc was the proper setting for setting the terminal title when I did a cd, and I had completely forgotten how to do it. So today I searched quite a few commands the environment variables for doing the same and found it again.
Here it is (Just put this in your bashrc or bash_profile):
export PROMPT_COMMAND=\’echo -ne \”\\033]0;`pwd`\”; echo -ne \”\\007\”\’
[Edit] I just tried this with eterm and gnome-terminal and it works on both.