On modern distributions (those with XFree86 4.0+ or Xorg), xterm should use UTF-8 as long as your locale is properly set. If this doesn’t work, the problem could be one of two things:
- You may need to tell xterm to use Unicode fonts. Try xterm -fn -misc-fixed-medium-r-semicondensed--13-120-75-75-c-60-iso10646-1.
- You may need to force xterm into UTF-8 mode with xterm -u8.
If you find that combinations like Meta+Return and Meta+Backspace do not work properly in UTF-8 xterm, see Debian bug #179286 for a fix.