As far as I can tell I shouldn't be using ÅÄÖ (somthing like they have no visual representation in ASCII??).
So what is considered more SEO friendly? Replacing i.e. all "ä" with "a" or "ae"? (The CMS Umbraco replaces with ae and I'm leaning towards this).
EDIT: Summary of how some Swedish sites does it:
aftonbladet.se/ ä => a (http://www.aftonbladet.se/kropphalsa/)
uppsatser.se/ ä => ä (http://www.uppsatser.se/om/v%C3%A5rd+av/)
lindqvist.com/ ä => a (http://www.lindqvist.com/b/google-maps-placering-ar-gratis)
umbraco CMS sites (like vaxab.se) ä => ae (http://vaxab.se/tjaenster.aspx)
dn.se/ ä => a (http://www.dn.se/sthlm/brak-utanfor-aspuddsbadet-1.1008899)
In my opinion, if accented characters has to be retained for their real meaning, then it shouldn't be renamed.
Most case, replacing with the ASCII alphabet cousins should be good. E.g. replacing "résumé" with "resume" makes sense as that's what people search for and understand given the right context.
Else retain accented characters with the URL encoded representation, e.g:%C5%C4%D6
will be the URL encoded representation for "ÅÄÖ".
Here are some of tips.
For what it's worth, Wikipedia, one of the biggest and most prominent sites on the Internet, preserves all sorts of weird diacritics in its URLs. Conventions for changing diacritics to plain letters will vary between languages: Acute and grave accents in French can be safely removed. (The French themselves tend to remove them when writing in block capitals.) Fadas in Irish should be retained if possible, or cleanly removed. Diaereses may be simply stripped, or replaced with a double vowel, or replaced with vowel+e, depending on the language. And for languages written in the Greek or Cyrillic alphabets, there's no obvious system unless you want to go for full transcription.
And there's no need: ru.wikipedia.org/wiki/Заглавная_страница
I'd suggest using the IDNA ToASCII that is the standard for internationalised top-level domains. ICANN have recently approved native-script top level domains using this algorithm, so I'd be surprised if any of the major search engines decided not to support it in future.
http://en.wikipedia.org/wiki/Internationalized_domain_name
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