psycopg2/extensions.py changes the dictionary it iterates through

You are somehow using psycopg on python 3 that has not been passed through 2to3.

2to3 correctly converts the line to an idiom non replacing inplace, specifically I get on Python 3.2:

@@ -154,10 +154,10 @@
 # When the encoding is set its name is cleaned up from - and _ and turned
 # uppercase, so an encoding not respecting these rules wouldn't be found in the
 # encodings keys and would raise an exception with the unicode typecaster
-for k, v in encodings.items():
+for k, v in list(encodings.items()):
     k = k.replace('_', '').replace('-', '').upper()
     encodings[k] = v

 del k, v

please see the Makefile to know how to convert psycopg from Python 2 to 3. Also note that Jason's package at http://www.stickpeople.com/projects/python/win-psycopg/ doesn't have this problem.