pygame.init()

screen = pygame.display.set_mode((1000,600))
screen.fill((255,255,255))
brush = pygame.image.load(os.path.join('C:Python27','brush.png'))
brush = pygame.transform.scale(brush,(128,128))

pygame.display.update()
clock = pygame.time.Clock()

z = 0

while 1:
    clock.tick(60)
x,y = pygame.mouse.get_pos()
for event in pygame.event.get():
    if event.type==pygame.QUIT:
    sys.exit()
    elif event.type == MOUSEBUTTONDOWN:
    z=1
        elif event.type == MOUSEBUTTONUP:
    z=0

    if z==1:
    screen.blit(brush,(x-64,y-64))
    pygame.display.update()

...
if event.type==pygame.QUIT:
sys.exit() # <-- missing indentation
elif event.type == MOUSEBUTTONDOWN:
z=1 # <-- missing indentation
    elif event.type == MOUSEBUTTONUP:
z=0 # <-- missing indentation
....