I'd like to add one thing to chazomaticus' excellent answer:

Don't forget the META tag either (like this, or the HTML4 or XHTML version of it):

<meta charset="utf-8">

That seems trivial, but IE7 has given me problems with that before.

I was doing everything right; the database, database connection and Content-Type HTTP header were all set to UTF-8, and it worked fine in all other browsers, but Internet Explorer still insisted on using the "Western European" encoding.

It turned out the page was missing the META tag. Adding that solved the problem.

Edit:

The W3C actually has a rather large section dedicated to I18N. They have a number of articles related to this issue – describing the HTTP, (X)HTML and CSS side of things:

They recommend using both the HTTP header and HTML meta tag (or XML declaration in case of XHTML served as XML).