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It's due to the way the python interpreter handles signals: when the signal is received, python runs a stub signal handler that just sets a flag indicating that the signal has been received: the actual handler is executed later, synchronously, mainly from the main evaluation loop.
The problem here is that since the main process is performing a read until EOF is reached (i.e. until the subprocess exits), the C code loops around the read(2) call without giving a chance for the handler to run.
A patch for is similar issue has been applied, see http://bugs.python.org/issue9617#
But it only fixed writes, not reads.
I think _bufferedreader_read_all and _bufferedreader_read_generic should be fixed too to call PyErr_CheckSignals().