I've deployed a merb app and rails app recently with git, both on slicehost.com boxes. For one I didn't need this option, and yet for the other I did...so, to anyone having issues with git deployment with capistrano, see if this helps. In your deploy.rb file add this line:
default_run_options[:pty] = true
The guys at github.com mention this in their guide to deploying with capistrano as well, so if you need other clues I suggest checking that out.