ubuntu 11.04 has native python2.7 i build python2.5 from source to /usr/local/python2.5/bin, and try to install lxml for my custom python2.5 install. Also i use virtualenv.
This problem is usually caused by building Python without using the --enable-unicode=ucs4 option on the ./configure command.
To make sure you do it right, delete the existing Python build directory and start building again by unzipping the Python tarball.
Also, delete the existing Python 2.5 install directory /usr/local/python2.5/ and rebuild everything else that you built such as lxml. Any extensions that use compiled components will look up the Python build configuration so if you don't rebuild everything you will have mismatched pieces.