I'm having the same issue: 

http://groups.google.com/group/google-appengine/browse_thread/thread/68a480cb7bec869e

I'm trying to Gzip the output from my app and it looks like the headers are not being properly set when I 
deploy the code to the goog servers. Everything works fine locally. 

This is how I'm setting the headers: 
    self.response.headers['Content-Encoding'] = 'gzip' 
    self.response.headers['Content-Type'] = 'text/html' 
    buf = compressBuf(htmltop+status+htmlbottom) 
    self.response.headers['Content-Length'] = str(len(buf)) 
    self.response.out.write(buf) 
Request to my local machine, 
nc localhost 8080 
GET / HTTP/1.1 
HTTP/1.0 200 OK 
Server: Development/1.0 Python/2.5 
Date: Thu, 17 Apr 2008 01:45:46 GMT 
Cache-Control: no-cache 
Content-Encoding: gzip 
Content-Type: text/html 
content-length: 2117 
Request to the deployed code, notice that the Content-Encoding and 
Content-Type headers are missing, 
nc myapp.appspot.com 80 
GET / HTTP/1.1 
Host: myapp.appspot.com 
HTTP/1.1 200 OK 
Cache-Control: no-cache 
Content-Type: text/html 
Server: Google Frontend 
Content-Length: 2062 
Date: Thu, 17 Apr 2008 01:44:29 GMT 

Just to add see the same thing

    contentType = 'application/vnd.google-earth.kml+xml'
    self.response.headers.add_header('Content-Type', contentType)

is totally ignored on appspot. Windows SDK seems fine. 

This is what is actully output
Content-Type: text/html; charset=utf-8

rev6 of 
http://svn.nearby.org.uk/google_appengine/trunk/geodatastore/file.py
shows the source code used. 

Currently, Google App Engine doesn't allow various headers to be set:
ACCEPT_ENCODING,

Outbound request headers:
CONTENT_LENGTH, DATE, HOST, REFERER, USER_AGENT, VARY, VIA, X_FORWARDED_FOR

Response headers:
CONTENT_ENCODING, CONTENT_LENGTH, DATE, SERVER, TRANSFER_ENCODING

This is an issue with the SDK which should be updated to reflect the behavior when
you upload your application.  Feel free to file a feature request for the ability to
GZip responses.

why?

+1 that this is a bug with production app-engine.  The app should be able to set the
content-encoding response header (and the content-length response header as well).

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Fixed in 1.1.6

What was fixed? Just content-encoding, or all of the formerly "forbidden" headers?

Doesn't seem to be fixed in SDK 1.3.0.