Variable shadowing in Python happens when a variable in a local scope (such as within a function) has the same name as a variable in an outer scope. This can lead to ambiguity and make the code harder to understand, as it may not be clear which variable is being referenced at any point. Shadowing can be avoided by using clear and distinct names, particularly in nested functions, and by understanding the scope in which a variable is defined. This practice enhances code readability and reduces errors related to variable name conflicts.