Problem:

(postgres)-# create database "newdb" WITH ENCODING = 'UTF8' LC_CTYPE='en_US.utf8' LC_COLLATE='en_US.utf8' TEMPLATE template0;
createdb: database creation failed: ERROR:  encoding UTF8 does not match locale en_US
DETAIL:  The chosen LC_CTYPE setting requires encoding LATIN1.

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(postgres)-# create database "newdb" WITH ENCODING = 'UTF8' LC_CTYPE='en_US.utf8' LC_COLLATE='en_US.utf8' TEMPLATE template0;
createdb: database creation failed: ERROR:  encoding UTF8 does not match locale en_US
DETAIL:  The chosen LC_CTYPE setting requires encoding LATIN1.

Check what locales you have

# locale -a
C
C.UTF-8
en_US
en_US.iso88591
POSIX

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# locale -a
C
C.UTF-8
en_US
en_US.iso88591
POSIX

If locales are not installed:

# apt-get install debconf
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# apt-get install debconf

To add en_US.UTF8, run:

# dpkg-reconfigure locales
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# dpkg-reconfigure locales

And select the locales you want (en_US.UTF8)

Now:

# locale -a
C
C.UTF-8
en_US
en_US.iso88591
en_US.utf8
POSIX

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# locale -a
C
C.UTF-8
en_US
en_US.iso88591
en_US.utf8
POSIX

You need to restart postgres:

# /usr/lib/postgresql/8.4/bin/pg_ctl restart -D /var/lib/postgresql/8.4/main

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# /usr/lib/postgresql/8.4/bin/pg_ctl restart -D /var/lib/postgresql/8.4/main

Now rerun:

(postgres)-# create database "newdb" WITH ENCODING = 'UTF8' LC_CTYPE='en_US.utf8' LC_COLLATE='en_US.utf8' TEMPLATE template0;
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(postgres)-# create database "newdb" WITH ENCODING = 'UTF8' LC_CTYPE='en_US.utf8' LC_COLLATE='en_US.utf8' TEMPLATE template0;