BUG #2400: 'Ã' considered invalid UTF-8 character

The following bug has been logged online:

Bug reference:      2400
Logged by:          Yusuf Siddiqui
Email address:      ysiddiqui@i3.com
PostgreSQL version: 8.1
Operating system:   Linux
Description:        'Æ' considered invalid UTF-8 character
Details:

The character 'Æ' is rejected as an invalid UTF-8 character.

Here are the steps used to recreate it:

create table test (text_field text);
insert into test (text_field) values ('Æ');

Returned error:
invalid UTF-8 byte sequence detected near byte 0x92

This statement also does not work:
insert into test (text_field) values ('\Æ');