Icelandic characters in lyrics

[Hrafnkell Eiríksson]

Hi
            
The icelandic language has a few characters that are not in
the common ASCII character set (but are a part of the
latin1 character set).
            
I'm able to use most of the characters in lyrics in Lilypond
(I've got language = icelandic in the paper section) but not
Ð ð  (called eth, Ð and ð in HTML)
Þ þ  (called thorn, Þ þ in HTML)
                       
When I use them I get:
! LaTeX Error: Command \TH unavailable in encoding OT1.  (for Þ)
! LaTeX Error: Command \th unavailable in encoding OT1.  (for þ)
! LaTeX Error: Command \DH unavailable in encoding OT1.  (for Ð)
! LaTeX Error: Command \dh unavailable in encoding OT1.  (for ð)
            
I can enter these characters in LaTeX (directly, not using any
escape sequences) if I do \usepackage{t1enc}.
I've tried adding usepackage = t1enc to paper but it doesn't
help.
                        
Is this a bug in Lilypond or am I doing something wrong?
            
My Lilypond version is 2.0.0 running on RedHat 9.
                        
Thanks in advance.
  Hrafnkell