Unless you have granted exclusive rights (which I strongly suggest you don't) your submissions for small presses, large publishing houses, and to literary agents will all be done as simultaneous submissions (sim-subs). This means that you will eventually run into a situation where someone wants the manuscript, and more than one person is currently reading the manuscript.
-- If this is a situation where multiple large presses want the manuscript it's time to call in an agent (or at least a lawyer of some form) and start talking advances.
-- If this is a situation where multiple agents want to represent you it's time to work the phones, ask questions, and weigh your options. Talk to each agent about your career and where you want to go, see who is a best fit not just for this one manuscript but for your long-term goals. And if you still can't decide let me know and I'll put you in touch with an author who had four agents vying to help her career along.
-- If this is a situation where you don't have an agent and don't have multiple presses offering to mud wrestle for the privilege of publishing your work it's time to send a Withdrawal Letter.
There are two basic forms, the first is for everyone who has only seen the basic query, and the second is for the people you have already had contact with more than once.
Letter 1:
Dear Editor,
Thank you for considering my [novel/la] [TITLE] which was sent to you [date]. At this time I have a contract offer from another publisher. I look forward to working with you on future projects.
Sincerely,
[Your Name]
Letter 2:
Dear Editor,
Thank you for considering my [novel/la] [TITLE] which was sent to you [date]. At this time I have a contract offer from another publisher. If you are still interested in [TITLE] please contact me by [next week]. I look forward to working with you on future projects.
Sincerely,
[Your Name and Contact Info]
In my experience this will net you one of two responses.
Response 1: Form Rejection... Don't take this to heart. All it means at this point is that the editor/press is acknowledging that you are publishing elsewhere and the copying and pasting a form rejection on the response is the easiest thing for them to do.
Response 2: Congrats and good luck! ... Usually this message is accompanied by a personal note of some form. "We read this and really liked it, we're glad you found a home for it!" -type of thing. This can come coupled with a polite rejection "I liked it but we aren't accepting Genre Z right now" or stand alone. Again, don't read to much into it.
Possibly there is a third response, one offering you a contract with the other house. If that happens you need to sit down with their offers, compare what's available, and make the most informed choice you can. This is also why you don't sign a contract until *after* you've withdrawn your work from everywhere else.
As always, if you have something to add I'd love to hear from you in the comments section.
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