BOL - XML and Internet Support - Retrieving and Writing XML Data - Retrieving XML Documents Using FOR XML - Guidelines for Using the FOR XML Clause

"The FOR XML clause is valid only in the SELECT statement and is subject to these limitations:

FOR XML is not valid in subselections, whether it is in UPDATE, INSERT, or DELETE statements, a nested SELECT statement, or other statements (SELECT INTO, assignment ). For example

DECLARE @doc nchar(3000)
SET @doc = (SELECT * FROM Customers WHERE CustomerID = 'ALFKI' FOR XML RAW)
"

И пользовательские переменные типа text, ntext и image также объявлять нельзя.

Придется формировать свою строковую переменную и использовать sp_xml_preparedocument