XSLT-process "is a minor mode for GNU Emacs/XEmacs which transforms it into a powerful editor with XSLT processing and debugging capabilities." It uses one of two Java-based XSLT processors (Saxon-B is free; an early version is included with XSLT-process, and I think you can upgrade) for some of the heavy lifting, but it includes a full XSLT debugger, with breakpoints, stepping functionality, and global and local variable viewing.

XSLT-process is released under the GPL.

See also: EmacsWiki: XmlParser. Info on XML parsing and manipulation from Emacs, including an XPath package. Some Emacs-based interactive XPath development tools would be nice, especially when built into xslt-process (I want to test XPath expressions from the context node and using local variables at a breakpoint)...