Why don't you read the file and write it as UTF-8? You can do that in Python.

#to support encodings
import codecs

#read input file
with codecs.open(path, 'r', encoding = 'utf8') as file:
  lines = file.read()

#write output file
with codecs.open(path, 'w', encoding = 'utf8') as file:
  file.write(lines)

You are trying to use the Python 3 version of the open() function, on Python 2. Between the major versions, I/O support was overhauled, supporting better encoding and decoding.

You can get the same new version in Python 2 as io.open() instead.

I'd use the shutil.copyfileobj() function to do the copying, so you don't have to read the whole file into memory:

import io
import shutil

with io.open(file_path_ansi, encoding='latin-1', errors='ignore') as source:
    with io.open(file_path_utf8, mode='w', encoding='utf-8') as target:
        shutil.copyfileobj(source, target)

Be careful though; most people talking about ANSI refer to one of the Windows codepages; you may really have a file in CP (codepage) 1252, which is almost, but not quite the same thing as ISO-8859-1 (Latin 1). If so, use cp1252 instead of latin-1 as the encoding parameter.

Use the encoding open from the io package instead of trying to roll your own.

import io
from __future__ import unicode_literals

with io.open(r"D:\Python Programs\New folder\ls.dat", "r", encoding="utf-8") as f1:
  with io.open(r"D:\Python Programs\New folder\OUTPUT.DAT", "w", encoding="utf-8") as f2:
    for line in f1:
      s1=line[0:len(line)]
      s3=s1[72:76].replace(u"HKAG", u"PNAG")
      s4=s1[0:72]+s3+s1[76:]
      f2.write(s4)