it still at alpha stage but the Rgis (composed of R packages terrain, RemoteSensing, gdistance ..) project look very promising. You can test the package on r-forge.
For raster data (DEM, altitude,...) handling there is the excellent raster package, and for other task like polygon clipping and more complicated stuff you can use rgeos (bidding of GEOS libs), maptools (for format exchange) or PBSmapping, and of course the sp package and the companion book Applied Spatial Analysis with R (Bivand, Pebsema and Rubio 2008) is a must.
On the other way, you can also link R to GIS like grass (spgrass6), saga (RSAGA), even QGIS and arcGIS but i don't use them.
finally you have to take a look at http://cran.r-project.org/web/views/Spatial.html
