Last night WebmasterRadio.FM aired a show with Vanessa Fox and Matt Cutts of Google, they talked about so many good things including how Google handles accent characters (see archived MP3 here). Last night, Vanessa posted a more detailed explanation saying that a Mexico will return results for both "Mexico" and "México" and the same is if a searcher enters in México, Google will return results for both "Mexico" and "México." It is clear that the results differ in ranking order, but what makes that order change - well, to me, it is not clear from the post. Vanessa also explains what triggers a different interface language and how to restrict search results with the plus sign operator.
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