EDIT
Your should consider integrating with AnyTerm.  You can then either expose AnyTerm directly e.g. via Apache mod_proxy, or have your Rails controller act as the reverse proxy (handling authentication/session validation, then playing back controller.request minus any cookies to localhost:<AnyTerm-daemon-port>, and sending back as a response whatever AnyTerm replies with.)
class ConsoleController < ApplicationController
  # AnyTerm speaks via HTTP POST only
  def update
    # validate session
    ...
    # forward request to AnyTerm
    response = Net::HTTP.post_form(URI.parse('http://localhost:#{AnyTermPort}/', request.params))
    headers['Content-Type'] = response['Content-Type']
    render_text response.body, response.status
  end
Otherwise, you'd need to use IO::Select or IO::read_noblock to know when data is available to be read (from either network or subprocess) so you don't deadlock.  See this too.  Also check that either your Rails is used in a multi-threaded environment or that your Ruby version is not affected by this IO::Select bug.
You can start with something along these lines:
status = POpen4::popen4("ping localhost") do |stdout, stderr, stdin, pid|  
  puts "PID #{pid}"  
  # our buffers 
  stdout_lines="" 
  stderr_lines=""
  begin
    loop do
      # check whether stdout, stderr or both are 
      #  ready to be read from without blocking 
      IO.select([stdout,stderr]).flatten.compact.each { |io|
        # stdout, if ready, goes to stdout_lines 
        stdout_lines += io.readpartial(1024) if io.fileno == stdout.fileno 
        # stderr, if ready, goes to stdout_lines 
        stderr_lines += io.readpartial(1024) if io.fileno == stderr.fileno 
      }
      break if stdout.closed? && stderr.closed? 
      # if we acumulated any complete lines (\n-terminated) 
      #  in either stdout/err_lines, output them now 
      stdout_lines.sub!(/.*\n/m) { puts $& ; '' } 
      stderr_lines.sub!(/.*\n/m) { puts $& ; '' } 
    end
  rescue EOFError
    puts "Done"
  end 
end 
To also handle stdin, change to:
      IO.select([stdout,stderr],[stdin]).flatten.compact.each { |io|
        # program ready to get stdin? do we have anything for it?
        if io.fileno == stdin.fileno && <got data from client?>
          <write a small chunk from client to stdin>
        end
        # stdout, if ready, goes to stdout_lines