Один лайнер:
a = "1a2b3c"
print ''.join(chr(int(a[i] + a[i+1], 16)) for i in xrange(0, len(a), 2))
Пояснение:
xrange(0, len(a), 2) # gives alternating indecis over the string
a[i] + a[i+1] # the pair of characters as a string
int(..., 16) # the string interpreted as a hex number
chr(...) # the character corresponding to the given hex number
''.join() # obtain a single string from the sequence of characters