Looping over a file unavoidably buffers things in pretty large chunks — a known issue with all Python 2.* implementations. It works as you intend in Python 3.1, with the final loop being slightly different:
for line in proc.stdout:
print(">>> " + str(line.rstrip()))
If upgrading to Python 3.1 is impractical (and I know it will often be!), go the other way and write the loop in an old-fashioned manner — the following version of the loop does work as you intend in Python 2.*:
while True:
line = proc.stdout.readline()
if not line:
break
print ">>> " + line.rstrip()