It does not matter if the offending app is using zero CPU, or is blocked in a system call that yields to other processes. It is, primarily when executing long running scripts. You are correct that this is a flaw in Pythonwin, and indeed why apps like Komodo run their Python programs out of process. It is because Pythonwin is not processing it's event loop.
Sleep just yields the processor.
It has no effect on the underlying problem - that Pythonwin is not processing messages. Whereever you want your program to do nothing for a period of time. It will have NO affect on the underlying problem. I hope I have made myself clear on the intentions side. As I said, I'm not writing GUI apps.