import collections # requires Python 2.7 -- see note below if you're using an earlier version
def merge_dict(d1, d2):
    """
    Modifies d1 in-place to contain values from d2.  If any value
    in d1 is a dictionary (or dict-like), *and* the corresponding
    value in d2 is also a dictionary, then merge them in-place.
    """
    for k,v2 in d2.items():
        v1 = d1.get(k) # returns None if v1 has no value for this key
        if ( isinstance(v1, collections.Mapping) and 
             isinstance(v2, collections.Mapping) ):
            merge_dict(v1, v2)
        else:
            d1[k] = v2
If you're not using Python 2.7+, then replace isinstance(v, collections.Mapping) with isinstance(v, dict) (for strict typing) or hasattr(v, "items") (for duck typing).
Note that if there's a conflict for some key -- i.e., if d1 has a string value and d2 has a dict value for that key -- then this implementation just keeps the value from d2 (similar to update)