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OK, I've rewritten the whole bz2 module (patch attached), and I think it is now ready for review. The BZ2File implementation is a cleaned-up version of the one from my previous patch, with some further additions. I've factored out the common compressor/decompressor stuff into classes Compressor and Decompressor in the _bz2 extension module; with these, BZ2Compressor, BZ2Decompressor, compress() and decompress() are trivial to implement in Python.
My earlier efficiency concerns seem to have been unfounded; I ran some quick tests with a 4MB bz2 file, and there wasn't any measurable performance difference from the existing all-C implementation.
I have added a peek() method to BZ2File, in accordance with Antoine's suggestion, but it's not clear how it should interpret its argument. I followed the lead of io.BufferedReader, and simply ignored the arg, returning whatever data as is already buffered. The patch also includes tests for peek() in test_bz2, based on test_io's BufferedRWPairTest.
Also, while looking at io.BufferedReader's implementation, I noticed that it doesn't actually seem to use raw.peek() at all. If this is correct, then perhaps peek() is unnecessary, and shouldn't be added.
The patch also adds a property 'eof' to BZ2Decompressor, so that the user can test whether EOF has been reached on the compressed stream.
For the new files (Modules/_bz2module.c and Lib/bz2.py), I'm guessing there should be some license boilerplate stuff added at the top of each. I wasn't sure exactly what this should look like, though - some advice would be helpful here.