-legacy-charset-handling: handle character set in prompts like older versions of PuTTYThis option applies to PuTTY (on all platforms), and also to all of PSCP, PSFTP and Plink on Windows.
In current versions of PuTTY, when you are prompted in the terminal window for things like SSH usernames and passwords, the responses you type are interpreted as Unicode, and transmitted to the server as such, even if the terminal is otherwise configured to use a different character encoding (see section 4.10.1). Similarly, the same prompts from the Windows console tools will unconditionally interpret their input as Unicode.
This behaviour is in line with the SSH standards; it allows things like usernames to use the full character set of the user's native language, and ensures that different keystrokes you type for your password are actually treated distinctly.
However, if you are used to the behaviour of the PuTTY tools up to version 0.81, this could cause a previously working username and/or password not to work as you expected. For instance, if you had set a password including some accented characters, this change in behaviour could cause the same keystrokes you've always entered to start sending a different sequence of bytes to the server, denying you access (and you wouldn't even be able to see the difference, since the password is not shown when you type it).
-legacy-charset-handling reverts the PuTTY tools' behaviour to how it was previously: what you type at these prompts will be interpreted according to the ‘Remote character set’ (for PuTTY) or Windows' default character set (for the Windows console tools).
(For example, this could allow you to log in to change your password to make using this option unnecessary in future. But if you're doing that, make sure the terminal is configured as UTF-8!)