[xslt] Does xslt has any encoding settings?

Hello there,
I have successfully created the xml using libxml. My xml contains some
french characters. When I use libxslt to create the html, it converts 
into %c3%A0. I am wondering is there any way I should specify the
encodings in the api calls for libxslt.
I use, xmlParseFile();

In generating the xml file however I use the functions to convert to UTF
and function convert to ISO while reading it. Should I do something like
that for xslt too?

Here is the xml and xsl snippets:
<? xml version="1.0" encoding="ISO-8859-1' ?>

<img src="{thumbimg}"/>

Thank you for all your help,

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