We're implementing a blog for a site which supports six different languages and five of them have non-Latin characters in their alphabets. We are not sure whether we should have them encoded (that is what we're doing at the moment)
Létání s potravinami: Co je dovoleno? becomes l%c3%a9t%c3%a1n%c3%ad-s-potravinami-co-je-dovoleno and the browser displays it as létání-s-potravinami-co-je-dovoleno.
or if we should replace them with their Latin "counterparts" (similar looking letters)
Létání s potravinami: Co je dovoleno? becomes letani-s-potravinami-co-je-dovoleno.
I can't find a definitive answer as to what's better from SEO perspective? Search engine optimization is very important for us. Which approach would you suggest?
Most of the times, search engines deal with latin counterparts good, although sometimes, results for i.e. "létání" and "letani" slightly differ.
So, in terms of SEO, almost no harm is done - once your site has good content, good markup and all that other stuff, your site won't suffer from having latin URLs.
You don't always know what combination of system browser and plugins users use, so make them as easy as possible - all websites use standard latin in URLs, because non-latin symbols can choke anything from server through browser to any plugin that might break user's experience.
And I can't stress this enough; Users before SEO!