I think maybe you need to add default_charset = "UTF-8" to your php.ini or .user.ini (in 5.3+), or use php_value in .htaccess to set it.
If that’s not it, this might be affected by the web server configuration as well.
Setting default_charset to UTF-8 in server-wide php.ini or php_value default_charset in .htaccess didn’t have an effect. Tested using PHP 5.2.9 and 5.1.6 *nix servers. And now, setlocale didn’t work on the other server (sigh).
I came up with the same problem. TransAlias works fine with friendly URLs (I use greek in the aliases) as long as "Use Friendly URL alias path" is set to NO.
If I change it to YES then I get the 404 error
If I change my aliases from greek to latin letters everything works fine
Take a look at the DB in PhpMyAdmin and make sure all the settings (Collation, DB, Tables, Fields) are UTF-8. If not, a full UTF-8 conversion might help: http://bobsguides.com/convert-db-utf8.html
