When you pass a lambda to sort, you need to return an integer, not a boolean. So your code should instead read as follows:
xs.sort(lambda x,y: cmp(len(x), len(y)))
Note that cmp is a builtin function such that cmp(x, y) returns -1 if x is less than y, 0 if x is equal to y, and 1 if x is greater than y.
Of course, you can instead use the key parameter:
xs.sort(key=lambda s: len(s))
This tells the sort method to order based on whatever the key function returns.
EDIT: Thanks to balpha and Ruslan below for pointing out that you can just pass len directly as the key parameter to the function, thus eliminating the need for a lambda:
xs.sort(key=len)
And as Ruslan points out below, you can also use the built-in sorted function rather than the list.sort method, which creates a new list rather than sorting the existing one in-place:
print(sorted(xs, key=len))