Recruiter asks if I'm interviewing with other companies

Answer honestly.  Depends on the situation how much you get into specifics.  I don't ask if they're interviewing elsewhere (I assume that anyone who meets my standards could be interviewing elsewhere).   What I do want to know (and what I generally ask) is if there for what factors will affect a candidate's decision timeline.  If there's a chance the candidate is going to get a job offer in a week, it's helpful if I know that (but the candidate is under no obligation to disclose that information).  
I have, however, asked this sort of question to open up a discussion to highlight the candidate's preparation (knowledge of industry, competitors, etc) and thought preparation (does the candidate have a plan in mind or just searching for any old job).  So, it can be an opportunity for a well-prepared candidate to demonstrate the breadth of thought and preparation.  And for a less well-prepared candidate to show that they're just broadcasting around to find a job.
This question can help with a competitive assessment, to find out who's recruiting, where, and in what disciplines.  Knowing that a competitor is also interviewing a surface scientist, for example, can tell me something about what they're doing or about products in the pipeline. 
Finally, the question can also help with creating a connection (networking) to another company.  If I have your contact information (particularly a personal e-mail) and you wind up landing somewhere else, I may use that as part of my network development. 
If you're currently in a good job, but are being recruited for a specific position, then "No" can be an appropriate answer.

Jen-
If you're going to answer honestly, it doesn't matter what the motivation is.  Generally, it's not a terribly kosher question, but kosher becomes a smaller and smaller set of behaviors these days.
My sense is that they are either fishing for competition for you, or asking you about how in demand you are.
It would be perfectly okay to say you're interviewing, and have had (as many as you have had), but would prefer not to share.  That may sound loof, but they would answer similarly if you asked them whom they were interviewing.
If you haven't had any interviews, and you've just started, say so.
If you haven't had any interviews and it's been awhile, be candid and say so.
And, it isn't a deal breaker.
Mark

Hi Jen,
At the risk of agreeing with Mark (which is, after all, Mike's job), it's generally an inappropriate question under the "none of your business" category.  At the same time, every interview you take should, in the recruiter's eyes, be your "dream job."  During the interview is not the time you decide you don't want it, nor the time you give want to convey any negativity.  Having said that, responding "it's none of your stinking business" is probably not the best answer.  I recommend something to this effect: "I've been speaking with several companies, but, as of today, no one has made me an offer I can't refuse," or something along those lines.  This won't alienate the recruiter (even though his/her question really is inappropriate), and perhaps may even get a chuckle, if he/she has any semblance of a sense of humor.  It may even give them a sense of urgency, which is sometimes why they ask the question - i.e. to determine how much time they have.  But after that, I agree with Mark again - if he/she pushes, I'd state that "I would prefer not to share any more details."  This is an acceptable answer, and quite frankly, reflects your professionalism.  Sharing those details could (and should) be perceived as unprofessional.