Notes:
Any ZOPE people in the audience? You'll like this one.
Like AxKit, 4Suite is more of a framework than just a straight XML transforming web server, but it's written in Python rather than Perl.
4Suite (or any subset of it, covering DOM, SAX, RDF, XSLT, XInclude, XPointer, XLink, XPath, etc) can be used as a class in your Python applications.
It can also be run fairly easily from the command-line as an external XSLT processor, or for offline generation of web sites.
If you combine it with the HTTP Listener, 4Suite Server can handle many HTTP requests directly, without using an external web server, although it does operate correctly with them if required.
4SS also integrates with the other poopular Python web software, Zope, to allow Zope users access to XML and XSLT capabilities on their sites. This can also be used as a basis for further development within Zope.
Python also has lots of extension libraries (including a large standard library) that allows it to interoperate with other network servers and popular databases.
The extension libraries are often used to allow recoding of processor-intensive tasks to a compiled language and then call this as an extension library from your application.