Sorry, forgot to mention: What seems to be happening in both cases ("nosetests" and "python setup.py test") based on the printed output is that each multiprocessing.Process that gets started executes the original command line ("nosetests" or "python setup.py test"), so each process starts running the test suite, causing an infinite fan-out.
@jpellerin I have had the same problem as you. We were seeing this running through buildbot. I have yet to get the workaround to work in buildbot that @chrisejones has provided.
We run the buildbot on both a Windows 7 64-bit environment and a Red Hat 5 64-bit environment both running Python 2.7.3. The Red Hat experiences no problems but the Windows 7 exhibits the same issue you have described. We have also tested with nose 1.1.2 and nose 1.3.0 and both exhibit this behavior.
The workaround will be ok for now as long as I can make it work with buildbot. Hopefully, this will get fixed soon.