Here is what you have to do :

1. In the configuration panel, in "advanced settings- replacement of non-ascii characters", you have to had to the list the accentueted characters you wish to replace : for instance : é|e, è|e, î|i... Personnaly, I added them at the begining of the list rather than at the end.

2. When you have added all the needed characters, save the change. Be careful, with version 1.3.3, there is a strange bug : when you press "save" you have a warning asking if you wish to delete the friendly URLs. You have to press "cancel" to actually save the changes !

3. But you MUST delete the friendly URLs created so far in order to have the changes you just made implemented. So click on "purge friendly URLs" to do so. Be sure not to purge the customized URLs you may have created !

It worked for me (check on my website).

I am interested also on how it works since we have the same problem in French.

You can also see an example here : http://www.picsound.be.

I use Joomla 1.0.11 - JoomSEF 1.3.1 + Virtuemart SEF - Virtuemart 1.0.7 - Joomfish 1.7