In Python, if I return inside a "with" block, will the file still close?

Yes.

def example(path, mode):
    with open(path, mode) as f:
        return [line for line in f if condition]

..is pretty much equivalent to:

def example(path, mode):
    f = open(path, mode)

    try:
        return [line for line in f if condition]
    finally:
        f.close()

More accurately, the __exit__ method in a context manager is always called when exiting the block (regardless of exceptions, returns etc). The file object's __exit__ method just calls f.close() (e.g here in CPython)

Yes, it acts like the finally block after a try block, i.e. it always executes (unless the python process terminates in an unusual way of course).

It is also mentioned in one of the examples of PEP-343 which is the specification for the with statement:

with locked(myLock):
    # Code here executes with myLock held.  The lock is
    # guaranteed to be released when the block is left (even
    # if via return or by an uncaught exception).

Something worth mentioning is however, that you cannot easily catch exceptions thrown by the open() call without putting the whole with block inside a try..except block which is usually not what one wants.