I think it would have to be set somewhere in America, since the GTA games are an outsider's parody of America and setting them in any other country would change the core game too much.
I doubt any city in Britain (or even much of Europe) would work very well since the roads are too narrow and the town layouts don't lend themselves well to a GTA style game (not since the franchise became 3D from GTA III onwards).
To remain true to the gameplay, it would have to be set in a country where both the populace and law enforcement are armed all the time, you need armed NPC's that pursue you as a consequence of committing crimes, but having every policeman and most civilians draw a side-arm and shoot at you in a game set in London would make it not seem like London any more, more so if the roads were widened to allow high speed pursuits.
Rockstar could and are perfectly capable of making another open world game set in another locale, as witnessed with Red Dead Redemption and the upcoming L.A. Noire, but the Grand Theft Auto series should remain in America, or to be accurate it's America lampooning universe.