The valid settings for MySQL 5.0 and 5.1:

You need to insert the following values in installtool - config all - DBinit

SET NAMES utf8;
SET CHARACTER SET utf8;

In localconf.php the complete UTF8 Section should look like this:

// UTF8
$TYPO3_CONF_VARS['BE']['forceCharset'] = 'utf-8';
$TYPO3_CONF_VARS['GFX']['TTFLocaleConv'] = 'UTF-8';
$TYPO3_CONF_VARS['SYS']['setDBinit'] = 'SET NAMES utf8 '.chr(10).'SET CHARACTER SET utf8 '.chr(10).''; 
$TYPO3_CONF_VARS['SYS']['t3lib_cs_convMethod'] = 'mbstring';
$TYPO3_CONF_VARS['SYS']['t3lib_cs_utils'] = 'mbstring';
$TYPO3_CONF_VARS['SYS']['UTF8filesystem'] = '1';

mbstring or iconv?

Instead of 'mbstring' you could also set 'iconv'
But until now 'mbstring' seems to process the conversion much faster than 'iconv'

Explanation:

SET NAMES utf8;

is an equivalent to

SET character_set_results=utf8;
SET character_set_connection=utf8;
SET character_set_client=utf8;

SET CHARACTER SET utf8;

is an equivalent to

SET character_set_client = utf8;
SET character_set_results = utf8;
SET collation_connection = @@collation_database;

(the latter includes SET character_set_connection =@@character_set_database;)