From http://docs.python.org/dev/library/doctest#which-docstrings-are-examined :

“The module docstring, and all function, class and method docstrings are searched. Objects imported into the module are not searched. [...] Any classes found are recursively searched similarly, to test docstrings in their contained methods and nested classes.”

The doc does not advertise support for nested functions, so this would be a new feature, if deemed useful.