The second case fails horribly. I have no idea why.

FYI, "ö" is not "o" in ASCII. "ö" doesn't exist in ASCII. \xC3 and \xB6 don't exist (have no meaning) in ASCII either. When you specify "LC_CTYPE=C", Perl doesn't know what the bytes \xC3 and \xB6 are supposed to be (that's why it complains that it cannot map them to Unicode).

If that's any consolation, it's IMPOSSIBLE to sanely mix one byte encodings (256 symbols max) and Unicode (> 1000000 codepoints). Perl itself is a great example of this (but that has been already discussed to death on this forum...)