The standalone Windows installer for Mercurial is built in a somewhat
jury-rigged fashion.

It has the following prerequisites, at least as I build it:

  Python for Windows
      http://www.python.org/ftp/python/2.4.3/python-2.4.3.msi

  MinGW
      http://www.mingw.org/

  Python for Windows Extensions
      http://sourceforge.net/projects/pywin32/

  mfc71.dll (just download, don't install)
      http://starship.python.net/crew/mhammond/win32/

  The py2exe distutils extension
      http://sourceforge.net/projects/py2exe/

  Inno Setup
      http://www.jrsoftware.org/isinfo.php

  ISTool - optional
      http://www.istool.org/default.aspx/

  add_path (you need only add_path.exe in the zip file)
      http://www.barisione.org/apps.html#add_path

And, of course, Mercurial itself.

Once you have all this installed and built, clone a copy of the
Mercurial repository you want to package, and name the repo
C:\hg\hg-release.

In a shell, build a standalone copy of the hg.exe program:

  python setup.py build -c mingw32
  python setup.py py2exe -b 1

Note: the previously suggested combined command of "python setup.py build -c
mingw32 py2exe -b 1" doesn't work correctly anymore as it doesn't include the
extensions in the mercurial subdirectory.

If you want to create a file named setup.cfg with the contents:

[build]
compiler=mingw32

you can skip the first build step.

Copy mfc71.dll and add_path.exe into the dist directory that just got created.

If you use ISTool, you open the C:\hg\hg-release\contrib\win32\mercurial.iss
file and type Ctrl-F9 to compile the installer file.

Otherwise you run the Inno Setup compiler.  Assuming it's on the path you run:

  iscc contrib\win32\mercurial.iss

The actual installer will be in the C:\hg\hg-release\Output directory.

To automate the steps above you may want to create a batchfile based on the
following:

  echo [build] > setup.cfg
  echo compiler=mingw32 >> setup.cfg
  python setup.py py2exe -b 1
  iscc contrib\win32\mercurial.iss

and run it from the root of the hg repository (c:\hg\hg-release).