diff --git a/Lib/xml/etree/ElementInclude.py b/Lib/xml/etree/ElementInclude.py
index 84fd7548b28..6cc1b44e958 100644
--- a/Lib/xml/etree/ElementInclude.py
+++ b/Lib/xml/etree/ElementInclude.py
@@ -67,7 +67,7 @@ class FatalIncludeError(SyntaxError):
 #
 # @param href Resource reference.
 # @param parse Parse mode.  Either "xml" or "text".
-# @param encoding Optional text encoding.
+# @param encoding Optional text encoding (UTF-8 by default for "text").
 # @return The expanded resource.  If the parse mode is "xml", this
 #    is an ElementTree instance.  If the parse mode is "text", this
 #    is a Unicode string.  If the loader fails, it can return None
@@ -75,13 +75,14 @@ class FatalIncludeError(SyntaxError):
 # @throws IOError If the loader fails to load the resource.
 
 def default_loader(href, parse, encoding=None):
-    file = open(href)
     if parse == "xml":
+        file = open(href, 'rb')
         data = ElementTree.parse(file).getroot()
     else:
+        if not encoding:
+            encoding = 'UTF-8'
+        file = open(href, 'r', encoding=encoding)
         data = file.read()
-        if encoding:
-            data = data.decode(encoding)
     file.close()
     return data
 
diff --git a/Misc/NEWS b/Misc/NEWS
index 34f6b3d71ad..f315c57b13c 100644
--- a/Misc/NEWS
+++ b/Misc/NEWS
@@ -200,6 +200,11 @@ Core and Builtins
 Library
 -------
 
+- Issue #12451: The XInclude default loader of xml.etree now decodes files from
+  UTF-8 instead of the locale encoding if the encoding is not specified. It now
+  also opens XML files for the parser in binary mode instead of the text mode
+  to avoid encoding issues.
+
 - Issue #12451: doctest.debug_script() doesn't create a temporary file
   anymore to avoid encoding issues.