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If you look at the Windows registry path atHKEY_LOCAL_MACHINE\SOFTWARE\Python\PythonCore\2.7\PythonPaththe value should look something like C:\Python27\Lib;C:\Python27\DLLs;C:\Python27\Lib\lib-tk
You must have this string value in your registry. So if it does not exist then you must create a new one with the same characteristic key string.
Rico, I solved my issue by disconnecting all of the SDE connections/users and then restarting the service. For some strange-ESRI reason that was all it took.