These instructions from Mac OS X Hints still work fine.
Screenshots below for Terminal in Mac OS X Snow Leopard (10.6).
Open Preferences.
Click the Settings tab.
Click the Keyboard tab.
Make sure that Use option as meta key is selected. This causes option-b to move the cursor back on word boundaries and option-f to move the cursor forward on word boundaries.
Then, click the + button.
Add a mapping to enable option-← to move the cursor back on word boundaries.
- Key: cursor left
- Modifier: option
- Action: send string to shell:
- \033b
Click OK. Click + again.
Add a mapping to enable option-→ to move the cursor forward on word boundaries.
- Key: cursor right
- Modifier: option
- Action: send string to shell:
- \033f
Click OK.
Done!
