XSLT 2.0 has a replace() function.
If you're stuck with 1.0, there is a template in the standard library that can stand in for the lack of a native function:
http://prdownloads.sourceforge.net/xsltsl/xsltsl-1.2.1.zip
http://xsltsl.sourceforge.net/string.html#template.str:subst