[teknomage1]

You are allowed to use any character that is valid in your declared encoding. The parser is supposed to be able to handle character encodings properly.

Whether you should be using a special tag depends on the semantics of the XML language you are targetting and should be defined by that standard. The xhtml xml language states that whitespace in the actual text nodes will be ignored and asks that you use 'br' tags instead. My homebrew XML frame delivery specification on the other hand uses literal unix-style newline characters in the text nodes. It all depends really.