"It is only possible way to register domain names containing the letters a-z, the figures 0-9 and hyphens, in DNS. IDN is a technique which makes it possible to use national characters (for instance æøå) in domain names by translating them into a version called ACE-format which only uses the original characters. It is this version that is registered in DNS. Domain names consisting of regular characters also have an ACE-form, but this form is identical with the domain name.
The ACE-format can be used by programs that support IDN, and by older programs that don't. Programs that support IDN will be able to translate between the two versions so that the user will be able to see and write domain names with national characters in addition to the ACE-format."
Source: Norid.no
To convert a domain to the ACE-format, use Norid's Conversion tool for .no.