question about scope

[John Salerno]

Here's a sentence from Learning Python:

"Names not assigned a value in the function definition are assumed to be 
enclosing scope locals (in an enclosing def), globals (in the enclosing 
module's namespace) or built-in (in the predefined __builtin__ names 
module Python provides."

I have trouble reading this sentence. First, I don't understand if the 
word 'enclosing' is a verb or an adjective. The whole flow of the 
sentence seems convoluted.

But my real question is this, which is related to the above:

"Name references search at most four scopes: local, then enclosing 
functions (if any), then global, then built-in."

I understand what global and built-in are, and I thought I understood 
the concept of local too, but when I got to this sentence (and the 
previous sentence), I became confused about the first two scopes. What's 
the difference between 'local' and 'enclosing functions'? I thought that 
the only way to create a local namespace was if there *was* a function 
definition, so now I'm confused by the apparent difference that the 
authors are referring to. What's an example of a local scope without 
having a function definition? Loops and if statements, perhaps?

And feel free to dissect that first sentence up above, because I just 
don't get it.

Thanks.