From the Block Language Spec:
In addition to the new Block type we also introduce a new storage qualifier, __block, for local variables. [testme: a __block declaration within a block literal] The __block storage qualifier is mutually exclusive to the existing local storage qualifiers auto, register, and static.[testme] Variables qualified by __block act as if they were in allocated storage and this storage is automatically recovered after last use of said variable. An implementation may choose an optimization where the storage is initially automatic and only "moved" to allocated (heap) storage upon a Block_copy of a referencing Block. Such variables may be mutated as normal variables are.
In the case where a __block variable is a Block one must assume that the __block variable resides in allocated storage and as such is assumed to reference a Block that is also in allocated storage (that it is the result of a Block_copy operation). Despite this there is no provision to do a Block_copy or a Block_release if an implementation provides initial automatic storage for Blocks. This is due to the inherent race condition of potentially several threads trying to update the shared variable and the need for synchronization around disposing of older values and copying new ones. Such synchronization is beyond the scope of this language specification.
For details on what a __block variable should compile to, see the Block Implementation Spec, section 2.3.