A friend of mine used to do something interesting when running roleplaying games: he'd use real-world historical names for famous characters in quasi-medieval fantasy worlds, so that the players would immediately have a sense of what those characters were like. If an NPC says to a player character, "King Glorbfong has sent his agents to seek you out," it probably doesn't mean much to the player; but "King Hitler has sent his agents to seek you out" might give the player the same sense of alarm the character would have. If the player can get over the oddness of the juxtaposition, anyway. (Another approach to this: Kam tells me that the GM of a game she played in college made the players read a novel the GM had written, set in the game world, so that when Prince Orgleborgle (or whoever) appeared in the doorway, the players would all know how their characters should react.)
I've seen something similar done in sf, and I find myself intrigued by it even though I'm not entirely sure I like it. For example, a story set on an alien world might have characters mention pine trees, and it's generally (though not always) to be understood that, just as the alien words are being translated into English for the benefit of English-speaking readers, the alien flora is being translated conceptually so the reader will know what kind of tree it is in relation to the local culture. "Pine tree" carries a lot more connotative weight for an English speaker than "kerflugle tree." (Of course, it carries somewhat different connotative weight for different people, depending on where you live and what your assocations with pine trees are.)
But sometimes it's hard to know where to draw the line. What about cultural stuff? If the alien kids play a game involving a ball and a hoop, does it make sense to refer to it as "basketball" even though the rules are entirely different?
Authors rarely go out of their way to call attention to such devices. One thing I liked about Dennis R. Caro's The Man in the Darksuit (Pocket Books, 1980) when I read it sometime last year was the explicit addressing of (and then playing with) this issue:
"Can you keep the farping thing at five fifty-two or not?"
(Farping is a convenience word. It doesn't mean anything, but everybody knows what it means. It wasn't even the word Coggins used, but it will do as an approximation. There is a race of humanoid lizards that requires the female to be fertilized by three separate males for conception. Coggins' obscenity described copulation among this species when fewer than three males were available—a pleasant interlude, but generally a waste of time.)
[...and a little later:]
(Minutes, and seconds for that matter, are familiar words. Coggins' "day" was broken into a thousand parts, one of which was the equivalent of eighty-eight point nine shakes of a lamb's tail or sixteen point three jiffies. Big deal.)
Often in sf stories, some words get translated and some don't. "I sat under the pine tree and ate my mifflin bread and gretzel cheese." There are some genre conventions governing this sort of thing (especially in High Fantasy, where there are horses, dogs, and dragons, but there are sometimes also schmertzbeasts and giffleflowers), but mostly people seem to go by gut feeling for what sounds right.
For me, it starts to get jarring when someone starts talking explicitly about the language. If a character who's speaking Old High Martian says "It's spelled just like it sounds: G as in grub, R as in red, O as in octopus, L as in liver, B as in basketball," I start to get pretty dubious. But what about idioms and puns? I think mostly I can suspend my disbelief about translations up to the point when something about the language seems specific to one particular time and place (which isn't where/when the story is set). If someone on Planet Krekk, where rocks are money, says "I need some greenbacks, some lettuce, some folding paper, some dead presidents," it jars me. In some sense it should be fine; the author is just translating for the reader, and presumably the Krekkian is really using equivalent slang phrases in its own hard-to-understand tongue. But the language calls too much attention to itself for me to continue to suspend disbelief.
Conclusion: translation is hard.
Real-life translators face similar issues, of course; I continue to be astonished that Michael Kandel managed to translate The Cyberiad:
"Have it compose a poem—a poem about a haircut! But lofty, noble, tragic, timeless, full of love, treachery, retribution, quiet heroism in the face of certain doom! Six lines, cleverly rhymed, and every word beginning with the letter S!"
Oh—one more reference point while I'm here: Lydia Davis's excellent and kinda spooky story "French Lesson I" (in her hard-to-find but worth-the-effort collection Break It Down) addresses some of this stuff in real-world languages.