If it is about UTF-8 life can be more "interesting" as expected. If you use sh as shell it might not work. But applications as mutt, slrn or vim work as expected. Please try to change to csh. In my case using sh and pressing äöü or so just results in beeping. When I start vim or csh or so I can enter the Umlaute and they appear on the screen. It is possible to use some ISO8859-something, but then issues with UTF-8 coded text, for example you receive by email will pop up.
Please check the output of locale
and please try csh and/or the console applications you like to use.