Here is my shot at it. It supports:

• removal of diacritics (so we don't just remove "invalid" characters)
• max length for the result (or before removal of diacritics - "early truncate")
• custom separator between normalized chunks
• the result can be forced to uppercase or lowercase
• configurable list of supported unicode categories
• configurable list of ranges of allowed characters
• supports framework 2.0

Code:

/// <summary>
/// Defines a set of utilities for creating slug urls.
/// </summary>
public static class Slug
{
    /// <summary>
    /// Creates a slug from the specified text.
    /// </summary>
    /// <param name="text">The text. If null if specified, null will be returned.</param>
    /// <returns>
    /// A slugged text.
    /// </returns>
    public static string Create(string text)
    {
        return Create(text, (SlugOptions)null);
    }

    /// <summary>
    /// Creates a slug from the specified text.
    /// </summary>
    /// <param name="text">The text. If null if specified, null will be returned.</param>
    /// <param name="options">The options. May be null.</param>
    /// <returns>A slugged text.</returns>
    public static string Create(string text, SlugOptions options)
    {
        if (text == null)
            return null;

        if (options == null)
        {
            options = new SlugOptions();
        }

        string normalised;
        if (options.EarlyTruncate && options.MaximumLength > 0 && text.Length > options.MaximumLength)
        {
            normalised = text.Substring(0, options.MaximumLength).Normalize(NormalizationForm.FormD);
        }
        else
        {
            normalised = text.Normalize(NormalizationForm.FormD);
        }
        int max = options.MaximumLength > 0 ? Math.Min(normalised.Length, options.MaximumLength) : normalised.Length;
        StringBuilder sb = new StringBuilder(max);
        for (int i = 0; i < normalised.Length; i++)
        {
            char c = normalised[i];
            UnicodeCategory uc = char.GetUnicodeCategory(c);
            if (options.AllowedUnicodeCategories.Contains(uc) && options.IsAllowed(c))
            {
                switch (uc)
                {
                    case UnicodeCategory.UppercaseLetter:
                        if (options.ToLower)
                        {
                            c = options.Culture != null ? char.ToLower(c, options.Culture) : char.ToLowerInvariant(c);
                        }
                        sb.Append(options.Replace(c));
                        break;

                    case UnicodeCategory.LowercaseLetter:
                        if (options.ToUpper)
                        {
                            c = options.Culture != null ? char.ToUpper(c, options.Culture) : char.ToUpperInvariant(c);
                        }
                        sb.Append(options.Replace(c));
                        break;

                    default:
                        sb.Append(options.Replace(c));
                        break;
                }
            }
            else if (uc == UnicodeCategory.NonSpacingMark)
            {
                // don't add a separator
            }
            else
            {
                if (options.Separator != null && !EndsWith(sb, options.Separator))
                {
                    sb.Append(options.Separator);
                }
            }

            if (options.MaximumLength > 0 && sb.Length >= options.MaximumLength)
                break;
        }

        string result = sb.ToString();

        if (options.MaximumLength > 0 && result.Length > options.MaximumLength)
        {
            result = result.Substring(0, options.MaximumLength);
        }

        if (!options.CanEndWithSeparator && options.Separator != null && result.EndsWith(options.Separator))
        {
            result = result.Substring(0, result.Length - options.Separator.Length);
        }

        return result.Normalize(NormalizationForm.FormC);
    }

    private static bool EndsWith(StringBuilder sb, string text)
    {
        if (sb.Length < text.Length)
            return false;

        for (int i = 0; i < text.Length; i++)
        {
            if (sb[sb.Length - 1 - i] != text[text.Length - 1 - i])
                return false;
        }
        return true;
    }
}

/// <summary>
/// Defines options for the Slug utility class.
/// </summary>
public class SlugOptions
{
    /// <summary>
    /// Defines the default maximum length. Currently equal to 80.
    /// </summary>
    public const int DefaultMaximumLength = 80;

    /// <summary>
    /// Defines the default separator. Currently equal to "-".
    /// </summary>
    public const string DefaultSeparator = "-";

    private bool _toLower;
    private bool _toUpper;

    /// <summary>
    /// Initializes a new instance of the <see cref="SlugOptions"/> class.
    /// </summary>
    public SlugOptions()
    {
        MaximumLength = DefaultMaximumLength;
        Separator = DefaultSeparator;
        AllowedUnicodeCategories = new List<UnicodeCategory>();
        AllowedUnicodeCategories.Add(UnicodeCategory.UppercaseLetter);
        AllowedUnicodeCategories.Add(UnicodeCategory.LowercaseLetter);
        AllowedUnicodeCategories.Add(UnicodeCategory.DecimalDigitNumber);
        AllowedRanges = new List<KeyValuePair<short, short>>();
        AllowedRanges.Add(new KeyValuePair<short, short>((short)'a', (short)'z'));
        AllowedRanges.Add(new KeyValuePair<short, short>((short)'A', (short)'Z'));
        AllowedRanges.Add(new KeyValuePair<short, short>((short)'0', (short)'9'));
    }

    /// <summary>
    /// Gets the allowed unicode categories list.
    /// </summary>
    /// <value>
    /// The allowed unicode categories list.
    /// </value>
    public virtual IList<UnicodeCategory> AllowedUnicodeCategories { get; private set; }

    /// <summary>
    /// Gets the allowed ranges list.
    /// </summary>
    /// <value>
    /// The allowed ranges list.
    /// </value>
    public virtual IList<KeyValuePair<short, short>> AllowedRanges { get; private set; }

    /// <summary>
    /// Gets or sets the maximum length.
    /// </summary>
    /// <value>
    /// The maximum length.
    /// </value>
    public virtual int MaximumLength { get; set; }

    /// <summary>
    /// Gets or sets the separator.
    /// </summary>
    /// <value>
    /// The separator.
    /// </value>
    public virtual string Separator { get; set; }

    /// <summary>
    /// Gets or sets the culture for case conversion.
    /// </summary>
    /// <value>
    /// The culture.
    /// </value>
    public virtual CultureInfo Culture { get; set; }

    /// <summary>
    /// Gets or sets a value indicating whether the string can end with a separator string.
    /// </summary>
    /// <value>
    ///   <c>true</c> if the string can end with a separator string; otherwise, <c>false</c>.
    /// </value>
    public virtual bool CanEndWithSeparator { get; set; }

    /// <summary>
    /// Gets or sets a value indicating whether the string is truncated before normalization.
    /// </summary>
    /// <value>
    ///   <c>true</c> if the string is truncated before normalization; otherwise, <c>false</c>.
    /// </value>
    public virtual bool EarlyTruncate { get; set; }

    /// <summary>
    /// Gets or sets a value indicating whether to lowercase the resulting string.
    /// </summary>
    /// <value>
    ///   <c>true</c> if the resulting string must be lowercased; otherwise, <c>false</c>.
    /// </value>
    public virtual bool ToLower
    {
        get
        {
            return _toLower;
        }
        set
        {
            _toLower = value;
            if (_toLower)
            {
                _toUpper = false;
            }
        }
    }

    /// <summary>
    /// Gets or sets a value indicating whether to uppercase the resulting string.
    /// </summary>
    /// <value>
    ///   <c>true</c> if the resulting string must be uppercased; otherwise, <c>false</c>.
    /// </value>
    public virtual bool ToUpper
    {
        get
        {
            return _toUpper;
        }
        set
        {
            _toUpper = value;
            if (_toUpper)
            {
                _toLower = false;
            }
        }
    }

    /// <summary>
    /// Determines whether the specified character is allowed.
    /// </summary>
    /// <param name="character">The character.</param>
    /// <returns>true if the character is allowed; false otherwise.</returns>
    public virtual bool IsAllowed(char character)
    {
        foreach (var p in AllowedRanges)
        {
            if (character >= p.Key && character <= p.Value)
                return true;
        }
        return false;
    }

    /// <summary>
    /// Replaces the specified character by a given string.
    /// </summary>
    /// <param name="character">The character to replace.</param>
    /// <returns>a string.</returns>
    public virtual string Replace(char character)
    {
        return character.ToString();
    }
}