I noticed this morning that exactly the same issue will block upgrading my forum from 1.2.19 to 1.3.2.
My current installation of punBB is on Mysql 4.1.20, MySQL charset UTF-8, MySQL tables in charset latin1_general_ci
Upon upgrade I had exactly the same result as oliver: all database entries were chopped off at the point where a non ASCII character (typically é or è in my case) was encountered.
Cheers,
kingka