You need libreadline to make it work. For some stupid reason OSX doesnt come with it installed.
just get the gzipped one from here: http://www.pycs.net/bbum/2004/1/21/readline.so.gz then gunzip it and put the readline.so into /Library/Python/2.3/site-packages/ then fire up python again and it should work. -- http://mail.python.org/mailman/listinfo/python-list
