Can a flight instructor without instrument rating legally provide instrument training?
Long story short, a CFI without an instrument rating can provide training on the instrument flying required for a private certificate only. To provide instruction on the use of instruments for an instrument rating, a commercial certificate or an ATP certificate, the CFI must have an instrument rating.



You can read all the details in the Grayson (2010) legal interpretation and the FAA apparently revised 61.195 in 2009 to make this whole topic 'clearer':


  §61.195   Flight instructor limitations and qualifications.
  
  A person who holds a flight instructor certificate is subject to the
  following limitations:
  
  [...]
  
  (c) Instrument rating. A flight instructor may conduct instrument
  training for the issuance of an instrument rating, a type rating not
  limited to VFR, or the instrument training required for commercial
  pilot and airline transport pilot certificates if the following
  requirements are met: 
  
  (1) Except as provided in paragraph (c)(2) of this section, the flight
  instructor must hold an instrument rating appropriate to the aircraft
  used for the instrument training on his or her flight instructor
  certificate [...]


As the interpretation explains, the instrument training requirements for a private certificate are very general (61.107 and 61.109): "basic instrument maneuvers", " control and maneuvering of an airplane solely by reference to instruments". But the commercial and ATP requirements are much more specific (this is from 61.129): "attitude instrument flying, partial panel skills, recovery from unusual flight attitudes, and intercepting and tracking navigational systems". For that reason, CFIs who provide instruction for the private requirements only do not need an instrument rating.

Practically speaking, I've never met a CFI who didn't have an instrument rating. I'm guessing that a CFI without one would have limited value for employers and might even have issues with insurance.