In a setting where it is important to minimise social offense, which words can be used to denote mentally retarded individuals?
The special term for this is mentale Retardierung (that is what a physician would use). But most people use geistig behindert, mental beeinträchtigt or geistig zurückgeblieben. Also gehandicapt is possible, but colloquial. kognitiv beeinträchtigt or kognitiv behindert is possible, but is not used very often.
During my education as what I would translate to social assistant we had to call disabled people of every kind sozial benachteiligt. This sounds a bit odd for me, but this seems to be the political correct way to avoid everything that could have an insulting meaning.
Depending on the cause of mental retardation there are also other terms possible. fzwo's suggestion entwicklungsverzögert is only appopriate if the cause lies in a delayed child developement. If you got injured and are disabled because of that, this term is not used. If the intelligence (IQ) is reduced you can say minderbegabt. A person who has difficulties in learning, i.e. somebody with dyslexia, you call lernbehindert or lernschwach.
(Geistig) behindert is the correct term but somewhat blunt. Be aware that, as with "retarded", it is also used as an insult. Wikipedia says the correct medical term is mentale Retardierung, but nobody uses that.
Maybe it'll go the same way Idiot has gone in both English and German: From a diagnosis to a pure insult. Unlike English, German doesn't have a widely-accepted PC substitute for geistig behindert (yet?).
You might sometimes hear entwicklungsverzögert for mentally retarded children, though that might have slightly different meaning.
Most people don't care so much about what is politically correct an use "geistig behindert". When it comes to being involved in any way, e.g. personally or as a family member, people tend to use phrases that would not point to the fact, like "beeinträchtigt" or even only "anders". In professional contexts we place emphasis on the eductional needs with phrases like "Mensch mit einer Behinderung" or "jemand hat Förderbedarf im Bereich geistige Entwicklung".