hyphenation with special (Estonian) letters

Question

Hyphenation is working correctly most of the time, but it has problems with words that have Estonian letters like õ inside of the word. For example:

lõplikumõõtmeline.

I write it like this in TeX:

l~oplikum~o~otmeline.

LaTeX refuses to hyphenate this word. From output:

LaTeX2e <2005/12/01> Babel and hyphenation patterns for english, usenglishmax, dumylang, noh yphenation, arabic, basque, bulgarian, coptic, welsh, czech, slovak, german, ng erman, danish, esperanto, spanish, catalan, galician, estonian, farsi, finnish, french, greek, monogreek, ancientgreek, croatian, hungarian, interlingua, ibyc us, indonesian, icelandic, italian, latin, mongolian, dutch, norsk, polish, por tuguese, pinyin, romanian, russian, slovenian, uppersorbian, serbian, swedish, turkish, ukenglish, ukrainian, loaded.

...

Overfull \hbox (33.50668pt too wide) in paragraph at lines 969--970 []\T1/cmr/m/n/12 Eelneva n�i-te p[]ohjal si-sal-dab te-ki-ta-tud ope-raa-to-ri- deaal k[]oik l[]oplikum[]o[]otmelised|

I tried to search, but I only found such links, that did not help much:

1. Hyphenation of terms containing symbols other than letters
2. Hyphenation in LaTeX
3. pdflatex and \hyphenation

I tried to do like this:

\hyphenation{l~op-li-ku-m~o~ot-me-line}

But I got error:

! Improper \hyphenation will be flushed. \leavevmode ->\unhbox \voidb@x l.54 \hyphenation{l~ op-li-ku-m~o~ot-me-line}

What am I doing wrong?

EDIT: Here is my configuration:

\documentclass[12pt,a4paper,draft]{article}
\pagestyle{plain}
\usepackage[estonian]{babel}
\usepackage[a4paper]{geometry}
\usepackage{enumerate}
\usepackage[T1]{fontenc}
\usepackage{amsfonts}
\usepackage{indentfirst}
\usepackage{amsthm}
\usepackage{amsmath}
\usepackage{amssymb}
\usepackage{verbatim}
\usepackage{color}

EDIT2:

Here is the minimal working example:

\documentclass[12pt,a4paper,draft]{article}
\pagestyle{plain}
\usepackage[estonian]{babel}
\usepackage[a4paper]{geometry}
\usepackage{enumerate}
\usepackage[T1]{fontenc}
\usepackage{amsfonts}
\usepackage{indentfirst}
\usepackage{amsthm}
\usepackage{amsmath}
\usepackage{amssymb}
\usepackage{verbatim}
\usepackage{color}

\theoremstyle{plain}
\newtheorem{teoreem}{Teoreem}
\newtheorem{lause}[teoreem]{Lause}
\newtheorem{jareldus}[teoreem]{J\"areldus}
\newtheorem*{lemma*}{Lemma}
\newtheorem{defin}{Definitsioon}


\newenvironment{toestus}{\begin{proof}[T~oestus]}{\end{proof}}


\author{Rauni Lillemets}
\begin{document}

\begin{lause}
Olgu $1 \leq p \leq \infty, 1 \leq r \leq p^*$. 
\end{lause}
\begin{toestus}
Eelneva n"aite p~ohjal sisaldab tekitatud operaatorideaal k~oik l~oplikum~o~otmelised operaatorid.
\end{toestus}

\end{document}

Answer 1

Add \usepackage[T1]{fontenc}:

\documentclass{article}
\usepackage[T1]{fontenc}
\usepackage[estonian]{babel}
\begin{document}
\parbox{1pt}{\hspace{0pt}
  l~oplikum~o~otmeline
}
\end{document}

The \parbox is just to show all hyphenation points.

If I run your example, I get what follows (after removing the blank line before \end{toestus}:

The same if I run pdflatex in TeX Live 2007 and later versions. However, I get the problem with hyphenation in older TeX distribution if the input is given with direct typing of accented characters (in UTF-8 encoding): if I type

\begin{toestus}
Eelneva näite põhjal sisaldab tekitatud operaatorideaal kõik lõplikumõõtmelised operaatorid.
\end{toestus}

adding \usepackage[utf8]{inputenc}, I indeed get

However, if I run the same with TeX Live 2009, the hyphenation is correct.

Update your TeX distribution.