It looks like I slightly misremembered the terminology that emacs uses -- for them hitting control-space "activates" the mark, and this is called transient-mark-mode. Very consistent :-)
Transient mark mode does two things:
It causes the space between the mark and the cursor ("point") to be highlighted
Some commands like search-replace that would normally run over the whole buffer, instead restrict themselves to the highlighted region. I can't think of many applications for this in the prompt context (does prompt-toolkit even have a search/replace?)
If the users types a key that would normally change the buffer, then it has its normal effect and it immediately deactivates transient mark mode.
Apparently, control-space should not enter selection mode, but "active mark mode".
See: https://github.com/ipython/ipython/issues/9574