When using the system's NLS, the setlocale(3) function is called to determine appropriate character classification and sorting. This function typically examines the LANG and LC_CTYPE environment variables; refer to the system documentation for further details. When not using the system's NLS, the shell simulates it by assuming that the ISO 8859-1 character set is used whenever either of the LANG and LC_CTYPE variables are set, regardless of their values. Sorting is not affected for the simulated NLS.
In addition, with both real and simulated NLS, all printable characters in the range \200-\377, i.e. those that have M-char bindings, are automatically rebound to self-insert-command. The corresponding binding for the escape-char sequence, if any, is left alone. These characters are not rebound if the NOREBIND environment variable is set. This may be useful for the simulated NLS or a primitive real NLS which assumes full ISO 8859-1. Otherwise, all M-char bindings in the range \240-\377 are effectively undone. Explicitly rebinding the relevant keys with bindkey is of course still possible.
Unknown characters (i.e. those that are neither printable nor control characters) are printed in the format \nnn. If the tty is not in 8 bit mode, other 8 bit characters are printed by converting them to ASCII and using standout mode. The shell never changes the 7/8 bit mode of the tty and tracks user-initiated changes of 7/8 bit mode. NLS users (or, for that matter, those who want to use a meta key) may need to explicitly set the tty in 8 bit mode through the appropriate stty(1) command in, e.g., the ~/.login file.