Which version of Python is recommended for Pylons, and why?
Pylons itself says it needs at least 2.3, and recommends 2.4+. Since 2.6 is production ready, I'd use that.
You can use Python 2.3 to 2.6, though 2.3 support will be dropped in the next version. You can't use Python 3 yet.
There's no real reason to favor Python 2.5 or 2.6 at this point. Use what works best for you.
I'd say use 2.5 :
there is one reason to favor 2.5 over 2.6 : if you need to be compatible with the python given on a linux installation or on Macs (I dont' know what py version mac provide, but you get the idea).
Of course, if you need some feature of 2.6, please do it, but if it's not the case why require 2.6 ? Remember that your app will be hosted somewhere where restrictions apply for deployment.
If you will distribute your app on opensource, even more so.