Just checking again to see if anyone can shed any light on this. Mike's shortcut above is not really suitable for me as it changes the category name format in the breadcrumb, titles etc. and I don't want to go back and change all that.

There must be a simple bit of code somewhere that changes all foreign characters in directory names to underscore. All I want to do is change the underscore to a hyphen - it should be simple? I noticed in Links 3 there is no category.pm in admin/Links/Build - is build.pm where this happens now?

I've got no problems changing the core files, except that I don't know where this change needs to be made.