I understand that there is a bug made for Xterm settings, but that's all the information I was able to dig up here or from Google.

Is there any way to change the character encoding in terminal? I'm using UTF-8 on my server (I'm a bit noob but managed to get it working anyway) and have some problems with ö and ä when using Irssi through SSH.

for me the problem was solved by starting screen with -U (or continuing with -drU)

Well, that worked nicely, thanks.

There is a simple way of changing character encoding of XTerm. You have to be root and execute following:

# gconftool -s /apps/osso/xterm/encoding -t string UTF-8

In my case I wanted to replace UTF-8 with CP1251, so it looks like tis:

# gconftool -s /apps/osso/xterm/encoding -t string CP1251

You can change this way to desired encoding. To check current encoding use:

# gconftool -g /apps/osso/xterm/encoding