I'm marking this as resolved. The 1.6 added native support for colorization on 
Windows (thanks to sborho).

I've created a wincolor extension that performs this same hack at a lower
level.  It swaps out sys.stdout for an ANSI aware pyreadline console as soon
as wincolor is loaded into the hg process.

http://bitbucket.org/sborho/wincolor

Recent TortoiseHg nightly builds include pyreadline and wincolor, so the
color extension works right away if you enable wincolor as well, as in:

[extensions]
color =
wincolor =

It's an open topic for future optimization to combine wincolor into the
color extension, when wincolor is considered stable.

This update patch works with hg-1.5 on Windows cmd.exe

Still requires pyreadline to be installed

[sorry to be so late on that]

Maybe a less intrusive solution would be to replace sys.stdout directly in 
the color extension.

The attached patch allows the color extension to work on windows provided that
PyReadlines [1] is installed.

[1] http://ipython.scipy.org/moin/PyReadline/Intro