This is the post I have been waiting for! CODE I will also preface this with the fact that I personally just BASH my way with the scripts I write...
I work with Python more than I want for webserver services, and kind of hate it. It has a huge number of valuable parsing, function, and dynamic generation libraries, but every time I need to update it or recompile, I want to buy a bottle of whiskey to nurse my battered body after I have finally won. Powerful, useful but painful. And oh sweet gods of mercy, going lib to lib trying to find the whitespace bugs!
I have not worked with Lua before, but that code snippet makes me want to. In general I think any syntactically controlled programming language is far easier for a general audience than a grammar based one; you can look at and play with pieces of the syntax, while with a grammer you really need a formal guide or trial and error insanity (IMO experience at least). Combining Lua with the tag driven XML system and rolling up a mod would be code WYSIWYG. (With Python, your going to need to get the whitespace correct as a modder, not the most fun thing in the world)
The idea of this mod layer is really 2 pieces:
1) Performance Optimization / Creation: this should be C [whatever], preferably C++ to keep the languages vendor independent. I care about this kind of thing as I am never going to buy a MS dev environment. Visual Studio all you want to, my nakedly generated code just keeps trucking while you are patch dependent. This means people can create new mechanics and improve the engine, while keeping the barriers to entry skill rather than finance based.
2) Modder Scripting: Lua seems a much better option for the general programming audience you want to have access to this functionality. (See arguments above) Since you want people to be able to create interesting quests, stories, scripts, etc use the easier to learn language.
Heavenfall's comparative list of games I think argues this point very well. You CAN create great stuff with Python. MORE people create great stuff, with more differences between what they are creating, in Lua.
P.S. Also anyone who wants to tell me a simple way to deal with Python compiling, PLEASE DO!