While you could use sed, and I will typically only use sed if I need something that's write-only (that is, it only needs to work and doesn't need to be maintained).
I find the Python regular expression library to be more accessible (and gives the ability to add more powerful constructs).
import re
import sys
def href_repl(matcher):
"replace the matched URL with a hyperlink"
# here you could analyze the URL further and make exceptions, etc
# to how you did the substitution. For now, do a simple
# substitution.
href = matcher.group(0)
return '<a href="{href}">{href}</a>'.format(**vars())
text = open(sys.argv[1]).read()
url_pattern = re.compile(re.escape('http://') + '[^ ]*')
sys.stdout.write(url_pattern.sub(href_repl, text))
Personally, I find that much easier to read and maintain.