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the __iter__ method is supposed to return an object that
defines a 'next' method.  The returned object is the one
used for iteration, not the original.  So I believe the
error message is correct - Test does not support iteration.
 If you change the code to:

>>> class test:
...   def __iter__(self):
...     return self
...   def next(self):
...     raise IOError
... 
>>> reduce(operator.add, test())

You get the expected result...

Traceback (most recent call last):
&nbsp;&nbsp;File "<stdin>", line 1, in ?
&nbsp;&nbsp;File "<stdin>", line 5, in next
IOError