lucy24 - 9:30 am on Feb 16, 2012 (gmt 0)
I don't think you are doing anything wrong. %C3%BC is the correct UTF-8 encoding for ü, and you said that your file is UTF-8. It would be more worrying if you didn't get this result.
The fact that the translation service demands ISO-Latin-1 encoding is their problem, not yours. How do they handle input outside the Latin-1 range, like Cyrillic or Hebrew?
Oh, wait. Are you doing the encoding at your end (charCodeAt or whatever it's called) or are you sending out the unencoded word? I kinda think you want a parseInt in there somewhere. At least that what I've got in my own script-changing routines. But those are for non-Roman scripts. Are you working strictly in the Latin-1 range?
:: wandering off to see what's involved in disencoding simple Latin-1 ::