ERROR: Error installing mysql:
ERROR: Failed to build gem native extension

The reason was that the Mysql files are installed under version specific directories and files when installing from Macports. For example, mysql5 or /opt/local/lib/mysql5. This messes up the mysql gem installation because it looks elsewhere by default. The solution is to specify the exact mysql config location in the installation process:

bash-3.2# /opt/ruby-enterprise-1.8.6-20090201/bin/ruby \
  /opt/ruby-enterprise-1.8.6-20090201/bin/gem install mysql \
  --  --with-mysql-config=/opt/local/bin/mysql_config5

That last line is two dashes (-) followed by the --with-mysql-config option.

Easy as pie.