Can you say more about the testing configuration you are using? With OS X 10.6.8, xterm 251, bash 3.2.48(1), and with no .bashrc, and after trying to set my PS1 to match yours (failing, as the lightning bolt came up as an o with an umlaut), I get the following behavior for the same test:

    saurik ~ ö bob
    saurik ~ ö cat
    ^C
    saurik ~ ö

your term looks ok im using linux and konsole bash 4.2.24(2)-release

the lightning bolt is just an utf8 fancy char

this is my PS1 if you like it: \[\e[0;32m\]\u\[\e[m\] \[\e[1;34m\]\w\[\e[m\] \[\e[1;33m\]⚡\[\e[m\] \[\e[1;37m\]