Per a comment here: http://code.google.com/p/appengine-monkey/wiki/Pylons
I was briefly confused by the following error:
Error - <type 'exceptions.AttributeError'>: 'module' object has no attribute 'load_source'
I had pointed my development.ini to the default one created by Pylons - which has caching turned on. This makes Mako attemp to call imp.load_source, which isnt part of GAE. Turned off caching and it works like a charm.