The readline library is responsible for interaction with programs like bash, ftp and psql. With recent versions of the library you don’t need to make the changes described below if you have set LC_CTYPE correctly (see locales part above).
However, with potato or a prior release of Debian, you will need additional configuration. There are two files where you may configure this: /etc/inputrc (system-wide) and ˜/.inputrc (per user). The following configuration should enable you to type foreign characters as well as making programs output them properly.
set meta-flag on
set convert-meta off
set input-meta on
set output-meta on