diff --git a/lib/sinatra/base.rb b/lib/sinatra/base.rb
index 1191b906..4330e875 100644
--- a/lib/sinatra/base.rb
+++ b/lib/sinatra/base.rb
@@ -921,15 +921,20 @@ module Sinatra
         end
 
         if data
+          if app and app.lines.first =~ /^\s*#\W*encoding\W*(\w[\w_\-\.\d]+)\W*$/
+            encoding = $1
+          else
+            encoding = settings.default_encoding
+          end
           lines = app.count("\n") + 1
           template = nil
           data.each_line do |line|
             lines += 1
             if line =~ /^@@\s*(.*\S)\s*$/
-              template = ''
+              template = force_encoding('', encoding)
               templates[$1.to_sym] = [template, file, lines]
             elsif template
-              template << line
+              template << force_encoding(line, encoding)
             end
           end
         end
@@ -1231,20 +1236,22 @@ module Sinatra
     #
     # The latter might not be necessary if Rack handles it one day.
     # Keep an eye on Rack's LH #100.
+    def force_encoding(*args) settings.force_encoding(*args) end
     if defined? Encoding
-      def force_encoding(data)
-        return if data == self || data.is_a?(Tempfile)
+      def self.force_encoding(data, encoding = default_encoding)
+        return if data == settings || data.is_a?(Tempfile)
         if data.respond_to? :force_encoding
-          data.force_encoding settings.default_encoding
+          data.force_encoding encoding
         elsif data.respond_to? :each_value
-          data.each_value { |v| force_encoding(v) }
+          data.each_value { |v| force_encoding(v, encoding) }
         elsif data.respond_to? :each
-          data.each { |v| force_encoding(v) }
+          data.each { |v| force_encoding(v, encoding) }
         end
+        data
       end
     else
-      def force_encoding(*) end
-    end
+      def self.force_encoding(data, *) data end
+      end
 
     reset!
 
diff --git a/test/templates_test.rb b/test/templates_test.rb
index f5729f36..7b26819b 100644
--- a/test/templates_test.rb
+++ b/test/templates_test.rb
@@ -1,3 +1,4 @@
+# encoding: UTF-8
 require File.dirname(__FILE__) + '/helper'
 File.delete(File.dirname(__FILE__) + '/views/layout.test') rescue nil
 
@@ -137,6 +138,12 @@ class TemplatesTest < Test::Unit::TestCase
     assert @app.templates.empty?
   end
 
+  it 'allows unicode in inline templates' do
+    mock_app { set :inline_templates, __FILE__ }
+    assert_equal "Den som tror at hemma det är där man bor har aldrig vart hos mig.\n\n",
+      @app.templates[:umlaut][0]
+  end
+
   it 'loads templates from specified views directory' do
     render_app { render :test, :hello, :views => options.views + '/foo' }
 
@@ -216,6 +223,9 @@ There's a space after 'bar'!
 @@ foo bar
 this is not foo
 
+@@ umlaut
+Den som tror at hemma det är där man bor har aldrig vart hos mig.
+
 @@ layout
 X
 = yield