For writing documentation, try Sphinx, which is used for the main Python documentation:

http://sphinx.pocoo.org/

For generating automated API docs from source code, pydoc is included with Python:

http://docs.python.org/library/pydoc.html

A nice library for writing documentation is doctest. It enables you to write examples of how your code should be executed in your documentation, for example:

def factorial(n):
    """Return the factorial of n, an exact integer >= 0.

    If the result is small enough to fit in an int, return an int.
    Else return a long.

    >>> [factorial(n) for n in range(6)]
    [1, 1, 2, 6, 24, 120]
    >>> [factorial(long(n)) for n in range(6)]
    [1, 1, 2, 6, 24, 120]

The nice part is that you can run the examples in the documentation as if they were real code, and see if they return the same result. It is a great way to keep the documentation consistent with the code, because if you write an example that doesn't work, you will get an error.

One option is Pdoc which, similarly to builtin Pydoc, extracts Python docstring documentation automatically. But, compared to the latter, it produces somewhat more nicely formatted and navigable output (example).