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This is a known problem.  See the April archives of the csv
mailing list:

http://manatee.mojam.com/pipermail/csv/2004-April/thread.html

Solutions are welcome.  I suspect any solution will involve
either
discarding PyIter_Next altogether or further subdividing what it
returns.

A couple things to note in the way of workarounds:

1. Reader_iternext() defers to PyIter_Next() to grab the
next line,
so there's really no opportunity to interject the
lineterminator into
the operation with the current code.  This means reading from
StringIO objects that use \r lineterminators will always fail.

2. If you have a real file as input and open it in universal
newline
mode you will get the correct behavior.