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OK, here is a patch. It adds an additional argument
firstline to read(). If this argument is true (i.e. if
called from readline()) and a decoding error happens, this
error will only be reported if it is in the first line.
Otherwise read() will decode up to the error position and
put the rest in the bytebuffer.

Unfortunately with this patch, I get a segfault with the
following stacktrace if I run the test. I don't know if this
is related to bug #1089395/patch #1101726. Martin, can you
take a look?

#0  0x08057ad1 in tok_nextc (tok=0x81ca7b0) at tokenizer.c:719
#1  0x08058558 in tok_get (tok=0x81ca7b0,
p_start=0xbffff3d4, p_end=0xbffff3d0) at tokenizer.c:1075
#2  0x08059331 in PyTokenizer_Get (tok=0x81ca7b0,
p_start=0xbffff3d4, p_end=0xbffff3d0) at tokenizer.c:1466
#3  0x080561b1 in parsetok (tok=0x81ca7b0, g=0x8167980,
start=257, err_ret=0xbffff440, flags=0) at parsetok.c:125
#4  0x0805613c in PyParser_ParseFileFlags (fp=0x816bdb8,
filename=0xbffff7b7 "./bug.py", g=0x8167980, start=257,
ps1=0x0, ps2=0x0, 
    err_ret=0xbffff440, flags=0) at parsetok.c:90
#5  0x080f3926 in PyParser_SimpleParseFileFlags
(fp=0x816bdb8, filename=0xbffff7b7 "./bug.py", start=257,
flags=0)
    at pythonrun.c:1345
#6  0x080f352b in PyRun_FileExFlags (fp=0x816bdb8,
filename=0xbffff7b7 "./bug.py", start=257, globals=0xb7d62e94, 
    locals=0xb7d62e94, closeit=1, flags=0xbffff544) at
pythonrun.c:1239
#7  0x080f22f2 in PyRun_SimpleFileExFlags (fp=0x816bdb8,
filename=0xbffff7b7 "./bug.py", closeit=1, flags=0xbffff544)
    at pythonrun.c:860
#8  0x080f1b16 in PyRun_AnyFileExFlags (fp=0x816bdb8,
filename=0xbffff7b7 "./bug.py", closeit=1, flags=0xbffff544)
    at pythonrun.c:664
#9  0x08055e45 in Py_Main (argc=2, argv=0xbffff5f4) at
main.c:484
#10 0x08055366 in main (argc=2, argv=0xbffff5f4) at python.c:23