An error occured while installing pg (0.13.2), and Bundler cannot continue - Rails 3 & PostgreSQL issues

"An error occured while installing pg (0.13.2), and Bundler cannot continue.
Make sure that `gem install pg -v '0.13.2'` succeeds before bundling"

Reason for this error could be "failed to build gem native extension", so make sure you have installed PostgreSQL headers properly.

For Ubuntu/Linux flavor, Use following command to install PostgreSQL client and development package

sudo apt-get install libpq-dev

Hope it may helpful to rectify you're problem with rails 3 application with PostgreSQL.