Rakefile

require 'rake/clean'

HAML   = FileList['**/*.haml']
LESS   = FileList['**/*.less']
COFFEE = FileList['**/*.coffee']

HTML = HAML.ext('html')
CSS  = LESS.ext('css')
JS   = COFFEE.ext('js')

CLOBBER.include(HTML, CSS, JS)

rule '.html' => '.haml' do |t|
   puts "  HAML #{t.source}"
   sh 'haml', t.source, t.name
end

rule '.css' => '.less' do |t|
   puts "  LESS #{t.source}"
   sh 'lessc', t.source, t.name
end

rule '.js' => '.coffee' do |t|
   puts "COFFEE #{t.source}"
   sh 'coffee', '-c', t.source
end

desc "Build all HTML, CSS and JavaScript files"
task :default => (HTML + CSS + JS)

desc "Continuously watch for changes and rebuild files"
task :watch => [:default] do
    require 'rubygems'
    require 'fssm'

    def rebuild
        sh 'rake'
        puts "    OK"
    rescue
        nil
    end

    begin
        FSSM.monitor(nil, ['**/*.coffee', '**/*.haml', '**/*.less']) do
            update { rebuild }
            delete { rebuild }
            create { rebuild }
        end
    rescue FSSM::CallbackError => e
        Process.exit
    end
end

@niksosf You did everything right — according to the Rakefile above, it does not output anything when watching. Just change some file, and it should be compiled. Feel free to add some puts statements. :)

And, no, you shouldn't overwrite the Rakefile from Rails — the best approach is to keep the file where you've put it, and to require lib/rasks/livereload.rake from your main Rakefile.

The problem is in this line:

task :watch => [:default] 

It invokes the default task before watching to regenerate content, however Rails defines it own version of default task. Change both occurrences of :default to something else (e.g. :rebuild), and you should be good to go.

@andreyvit
I added the line
require 'livereload'
to the Rakefile in the root dir
And I put livereload.rake in lib/tasks/.In livereload.rake, I changed both instances of :default to rebuild. Then when I run rake watch,
nothing happens.

So I thought, maybe it's monitoring and I should edit a shared.less file to see what happens. Indeed, after I edited and saved a sample file, something did happen:
C:/Users/Nik/.pik/rubies/Ruby-187-p299/bin/ruby.exe -I"lib;test" "C:/Users/Nik/.pik/rubies/Ruby-187-p299/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake/ra
ke_test_loader.rb"
C:/Users/Nik/.pik/rubies/Ruby-187-p299/bin/ruby.exe -I"lib;test" "C:/Users/Nik/.pik/rubies/Ruby-187-p299/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake/ra
ke_test_loader.rb"
C:/Users/Nik/.pik/rubies/Ruby-187-p299/bin/ruby.exe -I"lib;test" "C:/Users/Nik/.pik/rubies/Ruby-187-p299/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake/ra
ke_test_loader.rb"
OK
rake

I also have another command prompt running the livereload server and it does not say that shared.css or shared.less is update.

Then I tried removing everything in that Rakefile in the root and inserting the livereload gist, leaving the two instances of :default as they are.

And then I run
rake watch
immediately, I see
LESS app/stylesheets/sessions/shared.less
lessc app/stylesheets/sessions/shared.less app/stylesheets/sessions/shared.css

And then I went to my texteditor to change something in the shared.less and saved it. This time, I got some pretty instant response:
rake
(in c:/r/bakery)
LESS app/stylesheets/sessions/shared.less
lessc app/stylesheets/sessions/shared.less app/stylesheets/sessions/shared.css
OK
with bakery dir being my rails app dir
And I see

Modified: shared.css

in the livereload server prompt.

Unfortunately, though everything seems okay now, the webpage itself is not reloaded even when the livereload prompt detected a modification. And I made sure that the livereload is working for erb, css, html, js, and etc, while doing all the above.

I am running on Windows 7 64bit, Ruby 1.8.7.

@niksosf To avoid spamming everyone here, please contact me at andreyvit@gmail.com for further assistance. Also, if you are serious about web development, please stop using Windows, it will always be making things more difficult for you.