Is there any downside to using localized characters in urls?
There is technically nothing wrong with using them in a URI since they are valid URI characters.  Even multi-byte characters (Chinese, Korean, Japanese, etc.) are valid in the URI (i.e. domain.com/漢字漢字).

However, some people have requested that they not be allowed in the slug, so for the upcoming 2.2 release, we've added a config setting where you can disable the behavior and multi-byte characters are stripped and high-ASCII characters like ó are swapped with their low-ASCII counterparts (o).

I can't speak to any other non-technical reasons why they might not want to be used (SEO, etc.).