For a Project of mine I have set latex_documents to something like

latex_documents = [
  ('index', 'doc.tex', 'Documentation', 'Berthold Höllmann', 'manual'),
]

With this processing fails with:

LANG=C make latex
mkdir -p build/latex build/doctrees
sphinx-build -b latex -d build/doctrees -D latex_paper_size=a4 -N source
build/latex
Sphinx v0.4.2, building latex
trying to load pickled env... done
building [latex]: all documents
updating environment: 0 added, 1 changed, 0 removed
reading... index
pickling the env... done
checking consistency...
processing CrossSolverTests.tex... index
resolving references...
writing... Exception occurred:
  File
"/usr/software/gltools/python/Python-2.5/lib/python2.5/site-packages/Sphinx-0.4.2-py2.5.egg/sphinx/latexwriter.py",
line 162, in astext
    '\\renewcommand{\\indexname}{Index}\n' or '') + \
UnicodeDecodeError: 'ascii' codec can't decode byte 0xc3 in position
206: ordinal not in range(128)
The full traceback has been saved in /tmp/sphinx-err-l_u8H4.log, if you
want to report the issue to the author.
Please also report this if it was a user error, so that a better error
message can be provided next time.
Send reports to sphinx-dev@googlegroups.com. Thanks!
make: *** [latex] Error 1

changing ö to \"o does work.

Did you try using a Unicode string? IIRC the docs explicitly say that if
you include non-ASCII chars in the config you should use Unicode strings.

OK, using Unicode strings in conf.py does work, so make this a Bug in
sphinx-quickstart. My conf.py was generated by sphinx-quickstart, When
asked for the author(s) name I gave my name and conf.py was generated
with a simple string for the name information instead of a Unicode string.

Indeed, you're correct with that. This is now fixed in the 0.4 branch
with r65375.