Thanks for your post.

This issue is being tracked already:
Issue 1014 – Use UTF-8 for strings (such as password) with SSH protocol

• WinSCP Version 5.7.1 Build 5235
  
• Windows 7 64bit
  
• SCP Protocol
  

Connection was refused (Authentication fails) when I was connecting to my Linux machine.
Password contained a § character. I've changed the password to something else and I could connect to the Linux machine.
Then I've changed the password again and added another non-ASCII ß char to confirm my suspicion. Same problem here.

Connection via SSH/SCP from a console/bash was no problem even with non-ASCII chars.

I've also reported my problem on superuser website:
Authentication with ssh and scp works but not WinSCP

Kind regards
Severin