Which version of Python should be used?

A lot of 3rd party Python modules still require Python 2.x (numpy, scipy for example). If you will use any of those, or if you don't yet know what modules you need and want to keep your options open then stick with Python 2.x for now.

If you know that all the modules you need work with Python 3.x then go with that.

for a web project, chose the python version that is supported by your hosting provider.

if you are lucky to have a dedicated server, then chose whatever version is best supported by the framework you chose. python 3 is still not supported by the major web framework, so python 2.6 seems the best choice.

if your project is hosted on a shared host, you will have to stick with the python version installed on the host (personally, i am stuck with python 2.4.4, hoping my hosting provider will upgrade to 2.5 or 2.6, which will not come anytime soon)

I'd recommend Python 2.6 because it has some features of Python 3.x, but it still retains the same functionality found in Python 2.5. While some might argue that Python 3.x is better (quite possibly because of the immense amount of reorganisation and the fact that all strings are Unicode by default), most Python code in use right now is still for Python 2.x. I'd say stick with Python 2.6 until you need Python 3.x. :)

I use 2.5 for Google App Engine projects and 2.6 for my Django projects.