Converting from UTF-8 to Unicode is the right thing to do, but 
converting back to Latin-1 is not correct -- note that ET returns a 
Unicode string, not an 8-bit string.  There's a "makestring" helper that 
does the right thing in the library; just changing:

parcel = Py_BuildValue("ss", (prefix) ? prefix : "", uri);

to 

parcel = Py_BuildValue("sN", (prefix) ? prefix : "", makestring(uri));

should work (even if you should probably do that in two steps, and look 
for errors from makestring before proceeding).