I have installed Python 2.6.6 on CentOS 5.4,
[@SC-055 lxml-2.3beta1]$ python
Python 2.6.6 (r266:84292, Jan 4 2011, 09:49:55)
[GCC 4.1.2 20080704 (Red Hat 4
I had the same issue, I managed to install it after installing the package libxslt-devel and python-devel which seems to be your problem:
yum install libxslt-devel python-devel
python setup.py install
Installed /usr/lib/python2.6/site-packages/lxml-2.2.8-py2.6-linux-i686.egg
Processing dependencies for lxml==2.2.8
Finished processing dependencies for lxml==2.2.8
However since I also installed other packages in the process, you might want to double check libxml2, libxml2-devel and libxslt while you are at it.
Here is some information on how to build lxml: http://lxml.de/build.html