I spent several days working on this and finally managed to piece together some help from the ruby list. If you're into understanding it all, try this thread: Unicode in Regex - Ruby - Ruby-Forum
First, make sure you have this line at the top of your environment.rb file:
$KCODE = 'UTF8'
Next, make sure your regex ends with /u as in /\w+/u
Finally, this is how you specify UTF-8 characters:
'üéåë'.gsub(/#{"\303\253"}/u, 'x')
Ranges would like /#{"\303\200"}-#{"\303\226"}/u
You have to use the octal numbers, so that one above would replace ë with x.