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Unreal Engine 3 includes support for dynamically and statically lit translucency. However, translucent materials can only receive static shadows. They cannot receive dynamic shadows or light functions. In Lightmass, translucent materials filter light and create colored translucent shadows. To set up a translucent material, set the Lighting Model to MLM_Phong or MLM_Custom and set the Blend Mode to Blend_Translucent.
Note that even though UE3 supports dynamically lit translucency there may be artifacts from using multi-pass dynamic lighting. In some cases these can be alleviated by carefully choosing sort order, see TranslucentHairSorting.