Edit
I have made a solution that uses ctypes (which in turn uses C) to zero memory.
import sys
import ctypes
def zerome(string):
location = id(string) + 20
size = sys.getsizeof(string) - 20
memset = ctypes.cdll.msvcrt.memset
# For Linux, use the following. Change the 6 to whatever it is on your computer.
# memset = ctypes.CDLL("libc.so.6").memset
print "Clearing 0x%08x size %i bytes" % (location, size)
memset(location, 0, size)
I make no guarantees of the safety of this code. It is tested to work on x86 and CPython 2.6.2. A longer writeup is here.
Decrypting and encrypting in Python will not work. Strings and Integers are interned and persistent, which means you are leaving a mess of password information all over the place.
Hashing is the standard answer, though of course the plaintext eventually needs to be processed somewhere.
The correct solution is to do the sensitive processes as a C module.
But if your memory is constantly being compromised, I would rethink your security setup.