I've added a fprintf(stderr, "%s", path) to makepathobject(). I suspect
that PC/getpathp.c doesn't handle non ASCII chars correctly. It's using
char instead of w_char all over the place. Could that be related to the
issue, Neal?

Microsoft Windows XP [Version 5.1.2600]
(C) Copyright 1985-2001 Microsoft Corp.

c:\testäöü\PCBuild8\win32release>set PYTHONPATH=c:\testäöü\Lib

c:\testäöü\PCBuild8\win32release>python
c:\testõ÷³\Lib;c:\testõ÷³\PCBuild8\win32release\python30.zip;c:\testõ÷³\DLLs;c:\
testõ÷³\lib;c:\testõ÷³\lib\plat-win;c:\testõ÷³\lib\lib-tk;c:\testõ÷³\PCBuild8\wi
n32releaseFatal Python error: Py_Initialize: can't initialize sys
standard strea
ms
object  : ImportError('No module named encodings.utf_8',)
type    : ImportError
refcount: 4
address : 00A43540
lost sys.stderr

This application has requested the Runtime to terminate it in an unusual
way.
Please contact the application's support team for more information.