import sys

def foo():
    x = [o] * 100
    raise ArithmeticError

o = "something"
print sys.getrefcount(o)
try:
    foo()
except ArithmeticError:
    pass
print sys.getrefcount(o)

-------------------------------------------

Gives:

4
104


Looking at the CPython source, FrameObject's deallocator does actually decrement refcounts of its locals and arguments.  Guessing that the FrameObject is not being deallocated.