You can treat it like an exception (KeyboardInterrupt), like any other. Make a new file and run it from your shell with the following contents to see what I mean:

import time, sys

x = 1
while True:
    try:
        print x
        time.sleep(.3)
        x += 1
    except KeyboardInterrupt:
        print "Bye"
        sys.exit()

First, I'm not certain that you need a second thread to set the shutdown_flag.
Why not set it directly in the SIGTERM handler?

An alternative is to raise an exception from the SIGTERM handler, which will be propagated up the stack. Assuming you've got proper exception handling (e.g. with with/contextmanager and try: ... finally: blocks) this should be a fairly graceful shutdown, similar to if you were to Ctrl+C your program.

Example program signals-test.py:

#!/usr/bin/python

from time import sleep
import signal
import sys


def sigterm_handler(_signo, _stack_frame):
    # Raises SystemExit(0):
    sys.exit(0)

if sys.argv[1] == "handle_signal":
    signal.signal(signal.SIGTERM, sigterm_handler)

try:
    print "Hello"
    i = 0
    while True:
        i += 1
        print "Iteration #%i" % i
        sleep(1)
finally:
    print "Goodbye"

Now see the Ctrl+C behaviour:

$ ./signals-test.py default
Hello
Iteration #1
Iteration #2
Iteration #3
Iteration #4
^CGoodbye
Traceback (most recent call last):
  File "./signals-test.py", line 21, in <module>
    sleep(1)
KeyboardInterrupt
$ echo $?
1

This time I send it SIGTERM after 4 iterations with kill $(ps aux | grep signals-test | awk '/python/ {print $2}'):

$ ./signals-test.py default
Hello
Iteration #1
Iteration #2
Iteration #3
Iteration #4
Terminated
$ echo $?
143

This time I enable my custom SIGTERM handler and send it SIGTERM:

$ ./signals-test.py handle_signal
Hello
Iteration #1
Iteration #2
Iteration #3
Iteration #4
Goodbye
$ echo $?
0

I would recommend subprocess python module for running linux commands. In that, SIGINT signal (equivalent to Ctrl + C keyboard interrupt) can be sent programmatically to a command using Popen.send_signal(signal.SIGINT) function. Popen.communicate() function will give you output. For example

import subprocess
import signal

..
process = subprocess.Popen(..)  # pass cmd and args to the function
..
process.send_signal(signal.SIGINT)  # send Ctrl-C signal
..
stdout, stderr = process.communicate()  # get command output and error
..