UGN3503UA Hall-effect sensor
This little fellow detects magnetic flux and is dead simple to connect up, just 5V in and an analog output. Can be bought at most places selling electronic components. I bought mine at http://www.futurlec.com/index.shtml
I've posted a walkthru on using this as a positional sensor but it can be used as a gear tooth sensor or notch sensor in steel parts. See the attached datasheet for specifications and suggested uses.