As we have been used to from Pathauto 6, there was build in feature “Transliterate prior to creating alias”. This feature converts different character with diacritics to their twin, seo-positive version.
In Pathauto for Drupal 7 you need to install module Transliteration for this feature. After installation you’ll see “Transliterate prior to creating alias”. So don’t forget to check it.
Without this module you will see just “Reduce strings to letters and numbers” checkbox.
This issue was created for “Google purpose” – people now can google-out this solution.