So I was setting up virtualenv, during the setup process I was having this very common(!) error when I was trying to install MySQL-python. The solution is bit tricky. Though I found solution like, setting PATH on .profile, but actually that might work for normal installation.
I am on Mac OS 10.6.8 and for me the mysql_config file was in /usr/local/mysql/bin/ directory.
Edit the /bin/activate file from the virtualenv directory and add the following lines,
_OLD_VIRTUAL_PATH="$PATH" PATH="$VIRTUAL_ENV/bin:$PATH" PATH="$PATH:/usr/local/mysql/bin/" export PATH
then run the following command
this will change your path to virtualenv’s bin directory.
now try to install MySQL-python again.
and to undo the changes to $PATH