In general, WCF works correctly on Windows Azure. There is a problem using "add service reference" or svcutil but we have a patch to workaround the problem. The patch is installed in the cloud, and more information about this is here: http://code.msdn.microsoft.com/wcfazure/Wiki/View.aspx?title=KnownIssues (note that a web.config change is also required)
One of the things this prompted a lot of folks to ask is "Where is the Windows 7 version of this patch?"
Well, I'm happy to announce that we have released this QFE for Windows 7 and Windows Server 2008 R2: http://code.msdn.microsoft.com/KB977420
I also recommend that if you are using WCF on Windows Azure, you spend time browsing the content on http://code.msdn.microsoft.com/wcfazure.
You may also be interested in the REST service templates the WCF team has made available on the Visual Studio Gallery: http://visualstudiogallery.msdn.microsoft.com/en-us/842a05c3-4cc8-49d3-837f-5ec7e6b17e80 (this is the .NET 3.5 C# template, there are also .NET 3.5 VB and .NET 4 C# and VB templates)
Note that the REST templates aren't currently directly supported as a Windows Azure Role in the New Project Dialog, but you can easily use that template in a Windows Azure Cloud Service by following the "Using an Existing Project" section of this post.