DiffMerge does support UTF-8. By default it will look for a Byte Order Mark (BOM) at the beginning of the file to determine the encoding used for that file. In the absence of a BOM, your System Default will be used.
This is all configurable, however. Go to Tools -> Options, and under "File Windows" you'll see "Rulesets". Here you can set the encoding (and other settings) for various types of files, determined by file suffix (extension). There is also a Default that is used when no suffix match is found.

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For each Ruleset you can choose the character encoding, or you can choose to Ask when the file is loaded.

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Hope this helps.

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