Re gwynevans' post above, I thought I would mention that reinstalling python also turned out to be the solution for me to a similar problem.
I had downgraded my PW software from 5.6.1.1 to 5.3.3 so I could jailbreak it and install KUAL and library sync. This also required installing python. All worked well, but 5.3.3 does not have the extra search features that I was used to. So I upgraded back to 5.6.1.1 and found that librarysync got stuck on the "rebuilding collections" message, just like the original poster. Reinstalling librarysync did not help. But reinstalling python fixed the problem.
Perhaps the software upgrade changed the PATH variable so python could no longer be found?
In summary, jailbreak, MRPI, and librarysync were unaffected by the software upgrade, but python had to be reinstalled.
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