How to bundle a Python application including dependencies?
I use PyInstaller (the svn version) to create a stand-alone version of my program that includes Python and all the dependencies. It takes a little fiddling to get it to work right and include everything (as does py2exe and other similar programs, see this question), but then it works very well.
You then need to create an installer. NSIS Works great for that and is free, but it creates .exe files not .msi. If .msi is not necessary, I highly recommend it. Otherwise check out the answers to this question for other options.
My company uses the free InnoSetup tool. It is a moderately complex program that has tons of flexibility for building installers for windows. I believe that it creates .exe and not .msi files, however. InnoSetup is not python specific but we have created an installer for one of our products that installs python along with dependencies to locations specified by the user at install time.