The following minimal example omits the Croatian accented z/c from the author name in the compiled PDF.
\documentclass{article}
\usepackage{fontspec}
\usepackage[T1]{fontenc}
\usepackage[style=authoryear,firstinits,uniquename=init,natbib=true,backend=biber,indexing=true]{biblatex}
\addbibresource{Knezic.bib}
\begin{document}
\section*{\fullcite{Knezic2011}}
[...]
\printbibliography
\end{document}
where knezic.bib contains
@book{Knezic2011,
author={Knežić, D.},
year={2011},
title={Socratic Dialogue and Teacher-Pupil Interaction},
address={Hague, NL},
publisher={Eleven International Publishing}
}
i.e. PDF prints author as "D. Knei (2011) ..."
fontenc. – ienissei Mar 27 '12 at 8:45fontencbeforefontspec(or don't load it at all). Perhaps you will additionally have to use a font which has your chars. – Ulrike Fischer Mar 27 '12 at 9:04