@kovid - user_none wasn't able to figure out quite "why" it was going wrong. And yes the problem seems to be that for some unknown reason it does try to launch Sigil using the calibre dlls when using CreateProcess. Building Sigil on my own machine I never had the issue so it was specific to his build environment.
I tried setting the working directory using os.chdir(path) prior to the CreateProcess call but it makes no difference.
To add to the confusion, it seems it is only a problem with Sigil 0.6.0 (and the 0.5.9 betas that preceded it). As I just tried with Sigil 0.6.1 and 0.6.2 and they don't have the CRT conflict issue. So obviously user_none must have tweaked his build environment at some point since then and unknowingly fixed it
I am attaching a version of the Open With plugin that has my Sigil hack removed, which will work for any Sigil version *except* Sigil 0.6.0. So users wanting to launch Sigil with non UTF8 path characters have an option without renaming their books or moving their library.
Once Sigil 0.6.3 gets released I will officially release this version of the plugin, there should be no excuses not to upgrade Sigil when that comes out.