Ok I think this should be the final solution
I put back the codecs lines
*********
import codecs
**********
and a bit changed
************
f = codecs.open(fname, "w","utf-8")
**************
and in writing string literals used leading u to denote unicode string 
literals and it worked
****
tekst=u"Pozdrav Ž"
*******
even mixing Serbian Latin ŠĐČĆŽ Hungarian ŐÚÉÁŰ and Cyrilic ШЂЧЋЖ worked 
fine
so that should be it.

The thing that I didnt change was in utils.py, should I put it back or leave 
the change you introduced?

Z.

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