Thank you for your bug report, The problem seems to lie in __init.py__
and the fact that no coding has been specified. A potential workaround
may be adding:

# -*- coding: <utf-8> -*-

You can do this with the following command:

sudo nano /usr/lib/python2.5/xml/__init__.py

And then adding 
# -*- coding: <utf-8> -*-
to the very top of the file. Press ctrl-y to save and then ctrl-x.

If that does not work please remove the line again.

-- 
[gutsy] Update-manager fails to start
https://bugs.launchpad.net/bugs/146450
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