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I am trying to build a web part to be hosted on SharePoint online (part of Office 365). I want to use Entity Framework to connect to a DB in SQL Azure. Is this even possible? I tried deploying one solution, but I get very unhelpful error saying "Web Part Error: Sandboxed code execution request failed.".

Anyone get this combination working?

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I found out that this is not possible. The reason is due to the restricted permissions in the Sandbox and cannot use a proxy to bypass that. The only way to access SQL Azure from within SharePoint online in Office 365 is via a web service exposing operations on the entities residing in SQL Azure. I am currently investigating that approach and once I have more info, I can update this answer.

Update 7/27: Using a web service serving SQL Azure data, we can integrate SQL Azure with SharePoint. The component in SharePoint that enables this integration is called 'Business Connectivity Services'.

More can be found here: http://blogs.msdn.com/b/donovanf/archive/2012/06/25/office-365-o365-business-connectivity-services-bcs-hands-on-lab-wiring-up-o365-bcs-to-a-windows-azure-service-for-office-2010-and-sharepoint-online-solutions.aspx