Before thinking about how to implement this in python (or any language) lets look at the pseudocode, which looks like a pretty good plan to solve the problem.
I would guess that one thing you might be getting stuck on is the way the pseudocode references variables, like high and low. The way to understand variables is to consider them slots that values can be stored. At any given time, a variable has some value, like the number 5, or a reference to an open file. That value can be summoned at any time by using its name, or it can be given a new value by assigning to it, and the old value will be forgotten with the new value taking its place.
The pseudocode references three variables, high, low and tries. It also tells you what their initial values should be. After the second line has executed, those values are set to 1000, 1 and 1, respectively, but they take on new values as the program progresses.
Another feature of the pseudocode is a conditional loop, and a case analysis of the user input. Your translation of the pseudocode's loop is incorrect. In your case, you have created a new variable, i and have instructed your program to run the loop body with every value of i between 1 and 1000. Obviously this doesn't have a whole lot to do with the pseudocode.
Instead what you want to do is loop forever, until some condition (which changes in the loop body) becomes false. In python, the while statement does this. If you're familiar with an if statement, while looks the same, but after the body is done, the condition is re-evaluated and the body is executed again if it is still true.
Finally, the case analysis in the body of the loop requires comparing something to expected values. Although some other languages have a number of ways of expressing this, in python we only have if-elif-else clauses.
Outside of transforming pseudocode to working code, it is probably useful to understand what the program is actually doing. The key here is on line 4, where the program guesses the average of two values. after that the program acts on how well the guess worked out.
In the first run through the loop, with high containing 1000 and low containing 1, the average is 500 (actually the average is 500.5, but since we're averaging whole numbers, python guesses that we want the result of the division to also be an integer). Obviously that guess has only a 0.1% chance of being right, but if it's wrong, the user is expected to tell us if it was too high, or too low. Either way, that answer completely eliminates 50% of the possible guesses.
If, for instance, the user was thinking of a low number, then when the program guessed 500, the user would tell the program that 500 was too high, and then the program wouldn't ever have to guess that the number was in the range of 501 thru 1000. That can save the computer a lot of work.
To put that information to use, the program keeps track of the range of possible values the goal number could be. When the number guessed is too high, the program adjusts its upper bound downward, just below the guess, and if the guess was too low, the program adjusts its lower bound upward to just above the guess.
When the program guesses again, the guess is right in the middle of the possible range, cutting the range in half again. The number of possible guesses went from the original 1000 to 500 in one guess, to 250 in two guesses. If the program has terrible luck, and can't get it two (which is actually pretty likely), then by the third, it has only 125 numbers left to worry about. After the fourth guess, only 62 numbers remain in range. This continues, and after eight guesses, only 3 numbers remain, and the program tries the middle number for its ninth guess. If that turns out to be wrong, only one number is left, and the program guesses it!
This technique of splitting a range in half and then continuing to the closer half is called bisection and appears in a wide range topics of interest to computer science.
How about some CODE! Since i don't want to deprive you of the learning experience, I'll just give you some snippets that might help you along. python is a language designed for interactive exploration, so fire up your interpreter and give this a shot. I'll be posting examples with the prompts shown, don't actually type that.
Here's an example using the while clause:
>>> x = 1000
>>> while x > 1:
... x = x/2
... print x
...
500
250
125
62
31
15
7
3
1
>>> x
1
Getting console input from the user should be done through the raw_input() function. It just returns whatever the user types. This is a little harder to show. To simplify things, after every line of python that requires input, I'll type "Hello World!" (without the quotes)
>>> raw_input()
Hello World!
'Hello World!'
>>> y = raw_input()
Hello World!
>>> print y
Hello World!
>>>
How about some combining of concepts!
>>> myvar = ''
>>> while myvar != 'exit':
... myvar = raw_input()
... if myvar == 'apples':
... print "I like apples"
... elif myvar == 'bananas':
... print "I don't like bananas"
... else:
... print "I've never eaten", myvar
...
apples
I like apples
mangoes
I've never eaten mangoes
bananas
I don't like bananas
exit
I've never eaten exit
>>>
Oops. little bit of a bug there. See if you can fix it!