diff --git a/xml/impl/src/com/intellij/xml/actions/xmlbeans/GenerateInstanceDocumentFromSchemaAction.java b/xml/impl/src/com/intellij/xml/actions/xmlbeans/GenerateInstanceDocumentFromSchemaAction.java
index 4299df21b83b..fbb4fd56d5d5 100644
--- a/xml/impl/src/com/intellij/xml/actions/xmlbeans/GenerateInstanceDocumentFromSchemaAction.java
+++ b/xml/impl/src/com/intellij/xml/actions/xmlbeans/GenerateInstanceDocumentFromSchemaAction.java
@@ -39,10 +39,10 @@ import gnu.trove.THashMap;
 import org.jetbrains.annotations.NonNls;
 import org.jetbrains.annotations.Nullable;
 
+import java.io.ByteArrayInputStream;
 import java.io.File;
 import java.io.FileOutputStream;
 import java.io.IOException;
-import java.io.StringBufferInputStream;
 import java.util.LinkedList;
 import java.util.List;
 
@@ -57,7 +57,7 @@ public class GenerateInstanceDocumentFromSchemaAction extends AnAction {
     e.getPresentation().setEnabled(enabled);
     if (ActionPlaces.isPopupPlace(e.getPlace())) {
       e.getPresentation().setVisible(enabled);
-    }    
+    }
   }
 
   public void actionPerformed(AnActionEvent e) {
@@ -113,12 +113,12 @@ public class GenerateInstanceDocumentFromSchemaAction extends AnAction {
         (XmlFile) PsiManager.getInstance(project).findFile(relativeFile),
         new THashMap<String, String>(),
         new Xsd2InstanceUtils.SchemaReferenceProcessor() {
-          public void processSchema(String schemaFileName, String schemaContent) {
+          public void processSchema(String schemaFileName, byte[] schemaContent) {
             try {
               final String fullFileName = tempDir.getPath() + File.separatorChar + schemaFileName;
               FileUtils.saveStreamContentAsFile(
                 fullFileName,
-                new StringBufferInputStream(schemaContent)
+                new ByteArrayInputStream(schemaContent)
               );
             } catch (IOException e) {
               throw new RuntimeException(e);
@@ -147,26 +147,30 @@ public class GenerateInstanceDocumentFromSchemaAction extends AnAction {
 
     final VirtualFile baseDirForCreatedInstanceDocument1 = relativeFileDir;
     String xmlFileName = baseDirForCreatedInstanceDocument1.getPath() + File.separatorChar + dialog.getOutputFileName();
-    FileOutputStream fileOutputStream = null;
 
+    FileOutputStream fileOutputStream;
     try {
       fileOutputStream = new FileOutputStream(xmlFileName);
-      fileOutputStream.write(xml.getBytes());
-      fileOutputStream.close();
-      fileOutputStream = null;
+      try {
+        // the generated XML doesn't have any XML declaration -> utf-8
+        fileOutputStream.write(xml.getBytes("utf-8"));
+      }
+      finally {
+        fileOutputStream.close();
+      }
+
+      final File xmlFile = new File(xmlFileName);
+      VirtualFile virtualFile = ApplicationManager.getApplication().runWriteAction(new Computable<VirtualFile>() {
+        @Nullable
+        public VirtualFile compute() {
+          return LocalFileSystem.getInstance().refreshAndFindFileByIoFile(xmlFile);
+        }
+      });
+      FileEditorManager.getInstance(project).openFile(virtualFile, true);
     }
     catch (IOException e) {
-      e.printStackTrace();
+      Messages.showErrorDialog(project, "Could not save generated XML document: " + StringUtil.getMessage(e), XmlBundle.message("error"));
     }
-
-              final File xmlFile = new File(xmlFileName);
-    VirtualFile virtualFile = ApplicationManager.getApplication().runWriteAction(new Computable<VirtualFile>() {
-                @Nullable
-                public VirtualFile compute() {
-                  return LocalFileSystem.getInstance().refreshAndFindFileByIoFile(xmlFile);
-                }
-              });
-              FileEditorManager.getInstance(project).openFile(virtualFile, true);
   }
 
   static boolean isAcceptableFileForGenerateSchemaFromInstanceDocument(VirtualFile virtualFile) {
diff --git a/xml/impl/src/com/intellij/xml/actions/xmlbeans/Xsd2InstanceUtils.java b/xml/impl/src/com/intellij/xml/actions/xmlbeans/Xsd2InstanceUtils.java
index 0bb9ba882db5..c6c358eda169 100644
--- a/xml/impl/src/com/intellij/xml/actions/xmlbeans/Xsd2InstanceUtils.java
+++ b/xml/impl/src/com/intellij/xml/actions/xmlbeans/Xsd2InstanceUtils.java
@@ -15,6 +15,7 @@
  */
 package com.intellij.xml.actions.xmlbeans;
 
+import com.intellij.openapi.vfs.VirtualFile;
 import com.intellij.psi.PsiElement;
 import com.intellij.psi.PsiReference;
 import com.intellij.psi.XmlRecursiveElementVisitor;
@@ -28,12 +29,14 @@ import com.intellij.psi.xml.XmlTag;
 import com.intellij.xml.XmlElementDescriptor;
 import com.intellij.xml.XmlNSDescriptor;
 import com.intellij.xml.impl.schema.XmlNSDescriptorImpl;
+import com.intellij.xml.util.XmlUtil;
 import org.apache.xmlbeans.*;
 import org.apache.xmlbeans.impl.tool.CommandLine;
 import org.apache.xmlbeans.impl.xsd2inst.SampleXmlUtil;
 import org.jetbrains.annotations.NotNull;
 
 import java.io.File;
+import java.io.UnsupportedEncodingException;
 import java.util.*;
 
 
@@ -85,7 +88,7 @@ public class Xsd2InstanceUtils {
             }
             catch (Exception e)
             {
-                throw new IllegalArgumentException("Can not load schema file: " + schemaFiles[i] + ": ");
+                throw new IllegalArgumentException("Can not load schema file: " + schemaFiles[i] + ": " + e.getLocalizedMessage());
             }
         }
 
@@ -145,7 +148,7 @@ public class Xsd2InstanceUtils {
 
     return null;
   }
-  
+
   public static List<String> addVariantsFromRootTag(XmlTag rootTag) {
     PsiMetaData metaData = rootTag.getMetaData();
     if (metaData instanceof XmlNSDescriptorImpl) {
@@ -217,11 +220,26 @@ public class Xsd2InstanceUtils {
       }
     });
 
-    schemaReferenceProcessor.processSchema(fileName, result.toString());
+    final VirtualFile virtualFile = file.getVirtualFile();
+    final String content = result.toString();
+
+    byte[] bytes;
+    if (virtualFile != null) {
+      bytes = content.getBytes(virtualFile.getCharset());
+    } else {
+      try {
+        final String charsetName = XmlUtil.extractXmlEncodingFromProlog(content.getBytes());
+        bytes = charsetName != null ? content.getBytes(charsetName) : content.getBytes();
+      } catch (UnsupportedEncodingException e) {
+        bytes = content.getBytes();
+      }
+    }
+
+    schemaReferenceProcessor.processSchema(fileName, bytes);
     return fileName;
   }
 
   public interface SchemaReferenceProcessor {
-    void processSchema(String schemaFileName, String schemaContent);
+    void processSchema(String schemaFileName, byte[] schemaContent);
   }
 }