Yes, I do believe that 'gaol' is the spelling formerly used in British English and is still, technically, correct. I would say, however, that language is constantly evolving and, arguably, it is popular usage which defines whether a word is correct or not. I would say that, technically, 'gaol' is a correct spelling, regardless of the fact that my spell-checker doesn't recognise it, but seeing as the point of language is to convey your ideas to others, it would seem to make sense to use the standardised, generally accepted spelling. I could easily say 'verily I do declare that I find myself in a state of acute desire for some form of foodstuff', but it just seems to make sense to say 'I'm hungry', given that that is what most people will understand

. It's also considerably easier, but then so is the spelling 'jail' and that isn't really the point:).
Edit: Also, I'm with Lesley, 'The Ballad of Reading Gaol' is a brilliant poem (sorry for the minor distraction:).)