I'm not sure I understand all the implications of nested variables, either.  The current behavior of locals() is to return the names of all free variables that are being passed through the class body so that they can be used by methods.  Is the behavior correct?  I see that IronPython implements locals() that way, but does not bind them as class variables (good).  Should we change the "spec" of locals() and cause IronPython to be incompatible, or should we fix CPython and PyPy to behave the same way?  The fix for CPython will be somewhat involved.