Is there a way using py2exe or some other method to generate dll files instead of exe files?
I would want to basically create a normal win32 dll with normal function
I am not aware of py2exe being able to do that, as I believe that it does not actually make object symbols out of your Python code, but just embeds the compiled byte-code in an executable with the Python runtime).
Creating a native library may require a bit more work (to define the C/C++ interface to things) with the Python-C API. It may be somewhat easier using Elmer for that.