The accuracy of the time.sleep function depends on your underlying OS's sleep accuracy. For non-realtime OS's like a stock Windows the smallest interval you can sleep for is about 10-13ms. I have seen accurate sleeps within several milliseconds of that time when above the minimum 10-13ms.
Update:
Like mentioned in the docs cited below, it's common to do the sleep in a loop that will make sure to go back to sleep if it wakes you up early.
I should also mention that if you are running Ubuntu you can try out a pseudo real-time kernel (with the RT_PREEMPT patch set) by installing the rt kernel package (at least in Ubuntu 10.04 LTS).
EDIT: Correction non-realtime Linux kernels have minimum sleep interval much closer to 1ms then 10ms but it varies in a non-deterministic manner.
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