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After upgrading from Snow Leopard to Lion, ssh connections to remote servers using iTerm2 have issues with non ascii characters.

Luckily that’s easy to fix. Simply comment SendEnv LANG LC_* in /etc/ssh_config out.

 Host *
 # SendEnv LANG LC_*
 # ForwardAgent no
 # ForwardX11 no
 ...

No other changes are needed. You could also permanently change your locale to UTF-8.
Just place export LANG=en_US.UTF-8 in your shell’s source file.