It seems to be a windows-wide issue, not just something PuTTY specific. Even after I changed that in PuTTY (I already tried it), it failed.
I take it you've already found "Window -> Translation -> Received data assumed to be in which character set"? That's all that I have had to do in the past. There is also a possibility that your $TERM is causing confusion, as PuTTY pretends to be xterm.
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