Python 2.7.1 doesn't appear to do the usual implicit call to str() for subclasses of unicode. In the following snippet, I would have expected print myTest and print str(myTest) to behave the same:

>>> class Test(unicode):
...   def __str__(self):
...     print "In __str__"
...     return (u"*** " + self + u" ***").encode('utf-8')
...   def __unicode__(self):
...     print "In __unicode__"
...     return u"*** " + self + u" ***"
... 
>>> myTest = Test(u"abc")
>>> print myTest
abc
>>> print str(myTest)
In __str__
*** abc ***
>>> print unicode(myTest)
In __unicode__
*** abc ***

You subclassed unicode.  So print printed the value of your unicode object, which didn't need coercion.

For the record, this isn't as simple as I made it sound.  See, for example, issue 9196.

I guess I was confused by the inconsistency with Python 3, which *does* call the __str__ method, even though, again, no coercion is needed:

Python 3.2 (r32:88452, Feb 20 2011, 10:19:59) 
[GCC 4.0.1 (Apple Inc. build 5493)] on darwin
Type "help", "copyright", "credits" or "license" for more information.
>>> class X(str):
...   def __str__(self):
...     print("In __str__")
...     return "*** " + self + " ***"
... 
>>> x = X("abcde")
>>> print(x)
In __str__
*** abcde ***
>>> print(str(x))
In __str__
*** abcde ***

Well, it's possible I'm wrong and you've found a bug.  There are numerous differences between 2 and 3 in both string handling and special method handling, though, so it may be hard to pin down.  If you poke around a bit more and still think it is a bug, please reopen.

This has nothing to do with Python 3.  There's a difference in __str__ handling between Python 2.6 and Python 2.7.2.  It's enough to crash BeautifulSoup:

[Thread-8] Unexpected EXCEPTION while processing page "http://www.verisign.com": global name '__str__' is not defined
[Thread-8] Traceback (most recent call last):
...
[Thread-8]   File "C:\projects\sitetruth\BeautifulSoup.py", line 646, in prettify
[Thread-8]     return self.__str__(encoding, True)
[Thread-8]   File "C:\projects\sitetruth\BeautifulSoup.py", line 621, in __str__
[Thread-8]     contents = self.renderContents(encoding, prettyPrint, indentContents)
[Thread-8]   File "C:\projects\sitetruth\BeautifulSoup.py", line 656, in renderContents
[Thread-8]     text = c.__str__(encoding)
[Thread-8]   File "C:\projects\sitetruth\BeautifulSoup.py", line 415, in __str__
[Thread-8]     return "<!--%s-->" % NavigableString.__str__(self, encoding)
[Thread-8]   File "C:\projects\sitetruth\BeautifulSoup.py", line 393, in __unicode__
[Thread-8]     return __str__(self, None)
[Thread-8] NameError: global name '__str__' is not defined

The class method that's failing is simply

class NavigableString(unicode, PageElement):
...
    def __unicode__(self):
        return __str__(self, None)   #### EXCEPTION RAISED HERE ####

    def __str__(self, encoding=DEFAULT_OUTPUT_ENCODING):
        if encoding:
            return self.encode(encoding)
        else:
            return self

Using __str__ in the global namespace is probably wrong, and in a later version of BeautifulSoup, that code is changed to

    def __unicode__(self):
        return str(self).decode(DEFAULT_OUTPUT_ENCODING)

which seems to work.  However, it is a real change from 2.6 to 2.7 that breaks code.

> However, it is a real change from 2.6 to 2.7 that breaks code.

John, this issue is not the same as the one above.  The difference between Python 2.6 and Python 2.7.2 you mention only applies to % formatting.
The change is clearly documented in http://docs.python.org/dev/whatsnew/2.7.html
"""It’s now possible for a subclass of the built-in unicode type to override the __unicode__() method."""

This is clearly a bug in the application.  There are many ways to break compatibility with bogus code...