You might want to do this when the "inner" class is a one-off, which will never be used outside the definition of the outer class. For example to use a metaclass, it's sometimes handy to do
class Foo(object):
class __metaclass__(type):
....
instead of defining a metaclass separately, if you're only using it once.
The only other time I've used nested classes like that, I used the outer class only as a namespace to group a bunch of closely related classes together:
class Group(object):
class cls1(object):
...
class cls2(object):
...
Then from another module, you can import Group and refer to these as Group.cls1, Group.cls2 etc. However one might argue that you can accomplish exactly the same (perhaps in a less confusing way) by using a module.
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