I have a menu link whose link title contains a character entity (e.g. La Niña). However, Drupal isn't recognising the character entity and is further encoding the ampersand, so I'm ending up with La Niña. How do I fix that?
You can override themable output in your theme template.php file or in a custom module.
Basicaly, the point is that the l() function isn't called with the "html" option in theme_menu_link
See http://api.drupal.org/api/drupal/includes--common.inc/function/l/7 and http://api.drupal.org/api/drupal/includes--menu.inc/function/theme_menu_link/7