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reduce() in getpath.c chops down a path to the empty string rather than to /. As a result, if you build python with --prefix='' in the usual way for software to be installed into /, it tries to find its libraries in the current directory instead of in /lib:
$ python
Could not find platform independent libraries <prefix>
Could not find platform dependent libraries <exec_prefix>
Consider setting $PYTHONHOME to <prefix>[:<exec_prefix>]
'import site' failed; use -v for traceback
Python 2.5 (r25:51908, Feb 6 2007, 16:15:42) 
[GCC 3.4.3] on linux2
Type "help", "copyright", "credits" or "license" for more information.
>>> 
This is fixed by the attached patch.
$ python
Python 2.5 (r25:51908, Feb 6 2007, 16:19:38) 
[GCC 3.4.3] on linux2
Type "help", "copyright", "credits" or "license" for more information.
>>> 

I think the patch should be looked at very carefully as I guess that the reduce function is called all over the place.

Fortunately reduce() is static within getpath.c, so it should only be
necessary to check the handful of callers in there. I've done this, and
am reasonably sure it doesn't break anything.
In addition, I've given this patch quite a bit of empirical testing, at least under linux/glibc. This has been a persistent bug in Python since
2004 or earlier, and I've needed the attached fix on our Python builds
on all our production servers since then, rebasing for every release
from 2.4 to the new 2.7. (Our machines don't have legacy /usr dirs so
Python is installed to /bin and /lib.)
The exact patch I'm using right now against 2.7 is attached, but it's
essentially identical to the one I submitted originally against Python
2.4, and later against Python 2.5.

Can someone with a Linux box try the latest patch please.

getpath.c has been rewritten (see Issue45582). reduce is no longer there.

Irit Katriel <iritkatriel@gmail.com> added the comment:
> getpath.c has been rewritten (see Issue45582). reduce is no longer there.
Gosh, this is one I originally reported back in the late 1990s and then 
again mid-2000s! I've carried a patch in my distribution to make python 
work in /bin and /lib/python for over 25 years - it'll feel like end of an 
era to finally be able to drop that local patch. Thanks!
(Presumably this will land in Python 11 rather than get backported?)
Best wishes,
Chris.

> (Presumably this will land in Python 11 rather than get backported?)
I believe so.
> it'll feel like end of an era to finally be able to drop that local patch.
You should mark the occasion somehow, it's not everyday you say goodbye to a 25 year old patch!