I got just the same probelm as you do. And I have tried to solve this for a long time now. For me its either the content of the site thats getting messed up (when UFT-8) - or the xml output produces an error because its got special chars in norwegian (iso-8859-1).
Of course everything works fine in XML when using iso-8859-1 - but then the flash application messes it up because it cant read iso-8859-1 properly.... :(
Are you using the RSS feed - or have you made a new layoutmodule? *just wondering*
By the way, also tried to convert only the infected string into utf-8, with the utf_encode parameter (in template.ini)- but it seems this doesnt work either. I only get fatal error.
But, how does the existing RSS-module output UTF-8 through template code? Because I tried inserting special chars. into the feed - and load them into an .swf file with the xml-connector, and this actually worked as intended. The chars. where displayed as normal - but through the "regular" template-override system - it does not work! What to do?
Make sure your mysql-database is set to UTF-8. Change the templates (site.ini, template.ini and i18.ini). I am also using the fck-editor, and then you also must make sure that the template literal.tpl - is encoded into UTF-8. Because this made some extra unwanted symbols in the content (two questionmarks where shown) - this is probably because the template was written with another encoding, and the data corrupted due to this conversion.
Anyway, now my content is looking fine - and my flash application (with XML connector) reads the XML output just fine (with norwegian special chars.).