Index: lib/mako/exceptions.py
===================================================================
--- lib/mako/exceptions.py	(revision 258)
+++ lib/mako/exceptions.py	(working copy)
@@ -6,7 +6,7 @@
 
 """exception classes"""
 
-import traceback, sys, re
+import codecs, parser, re, sys, traceback
 
 class MakoException(Exception):
     pass
@@ -68,7 +68,12 @@
         if self.error is None:
             self.error = t
         if isinstance(self.error, CompileException) or isinstance(self.error, SyntaxException):
-            self.source = file(self.error.filename).read()
+            source_file = file(self.error.filename)
+            self.source = source_file.read()
+            self.source_encoding = _parse_encoding(source_file)
+            if self.source_encoding is None:
+                self.source_encoding = sys.getdefaultencoding()
+            source_file.close()
             self.lineno = self.error.lineno
             self._has_source = True
         self.reverse_records = [r for r in self.records]
@@ -188,7 +193,7 @@
 <h2>Error !</h2>
 <%
     tback = RichTraceback()
-    src = tback.source
+    src = tback.source.decode(tback.source_encoding, 'replace')
     line = tback.lineno
     if src:
         lines = src.split('\n')
@@ -221,3 +226,52 @@
 </body>
 </html>
 """)
+
+# Regexp to match python magic encoding line
+_PYTHON_MAGIC_COMMENT_re = re.compile(
+    r'[ \t\f]* \# .* coding[=:][ \t]*([-\w.]+)',
+    re.VERBOSE)
+
+def _parse_encoding(fp): 
+    """Deduce the encoding of a source file from magic comment. 
+	 
+    It does this in the same way as the `Python interpreter`__ 
+	 
+    .. __: http://docs.python.org/ref/encodings.html 
+	 
+    The ``fp`` argument should be a seekable file object.
+    """
+    pos = fp.tell()
+    fp.seek(0)
+    try:
+        line1 = fp.readline()
+        has_bom = line1.startswith(codecs.BOM_UTF8)
+        if has_bom:
+            line1 = line1[len(codecs.BOM_UTF8):]
+
+        m = _PYTHON_MAGIC_COMMENT_re.match(line1)
+        if not m:
+            try:
+                parser.suite(line1)
+            except SyntaxError:
+                # Either it's a real syntax error, in which case the source
+                # is not valid python source, or line2 is a continuation of
+                # line1, in which case we don't want to scan line2 for a magic
+                # comment.
+                pass
+            else:
+                line2 = fp.readline()
+                m = _PYTHON_MAGIC_COMMENT_re.match(line2)
+
+        if has_bom:
+            if m:
+                raise SyntaxError(
+                    "python refuses to compile code with both a UTF8"
+                    " byte-order-mark and a magic encoding comment")
+            return 'utf_8'
+        elif m:
+            return m.group(1)
+        else:
+            return None
+    finally:
+        fp.seek(pos)