Not sure if this is really needed. It can be done in user land. Its a bit of a convenience feature. Not many votes for it... Andrey, Johannes...?

The application has to know the encoding being used, else some strange things might happen. We have seen the trouble in having this globally configurable when Gentoo decided to use Utf-8 for their MySQL installations by default instead of MySQL's default. I doubt you can make an application Utf-8 comaptible by just setting such a low-level switch (it won't affect the HTTP Content-type header or HTML forms, thus receiving data in a wrong encoding from the user, not re-encode it etc.)

This is not about making application utf8 compatible. You can do this by "set names" query. But it may be redundant. For example: All my database is in utf8 encoding. All my pages have content-type utf8. All form posts from clients are in utf8. All strings I process in application are utf8. But what do I need to do right after I connect to database? - "set names utf8;" Why? Because if I don't, db will re-encode all strings to latin1. And PHP don't care. If I have 100 new connections to db per second, I need to 100 times run that query. Why if client and server could negotiate encoding in those 2 obliged packets? ( http://bugs.php.net/bug.php?id=54086 ). It's ok to set latin1 as default character set used by client to not affect existing applications (I believe mostly for those, who actualy don't know, what are they doing..). But I think it's very useful to have option to set encoding manualy via configuration option or in connect functions like: mysql_connect('localhost', 'user', 'pwd', true, MYSQL_CLIENT_ENCODING_UTF8);

Or am I somwhere wrong?

http://forge.mysql.com/wiki/MySQL_Internals_ClientServer_Protocol#Client_Authentication_Packet
http://dev.mysql.com/doc/refman/5.5/en/server-options.html#option_mysqld_default-character-set
http://dev.mysql.com/doc/refman/5.5/en/server-options.html#option_mysqld_character-set-client-handshake
http://bugs.php.net/bug.php?id=54086

mysqli has this. You can create a connection with mysqli_init() or just new mysql() and then call mysqli_options() or $link->options and set the charset to be used. It will be negotiated during the client-server handshake and there will be no additional query like SET NAMES. mysqli_options() works before connections is established, later it has no effect.

I compiled my server with default charset of utf32.  Now I cannot connect at all, 
therefore cannot execute any SET NAMES command.  So, this needs fixing.

PHP Warning:  mysqli_connect(): (HY000/1231): Variable 'character_set_client' 
can't be set to the value of 'utf32' in X line Y

in my above case, i can connect only if i start server with --skip-character-set-
client-handshake option

1. AFAIK the MySQL parser can't use UTF32 this is why SET NAMES doesn't work
2. Executing SET NAMES is the most improper way to change character set
3. The proper way is to use mysqli_options(), which is mysqli only
4. ext/mysql is deprecated and won't get changed
5. Example
$c=mysqli_init();
$c->options(MYSQLI_SET_CHARSET_NAME, "utf8");
$c->connect(....);
during handshake utf8 will become the charset to be used to talk to the MySQL parser.  Or maybe in the future MySQL will have a parser that accepts UTF16 and UTF32. By using mysqli_options() there is no additional round-trip to the server and the client library knows which character set is really in use, thus mysqli_real_escape_string() will correctly.