This transformation:
<xsl:stylesheet version="1.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
<xsl:output omit-xml-declaration="yes" indent="yes"/>
<xsl:template match="t">
<p>
<xsl:apply-templates/>
</p>
</xsl:template>
<xsl:template match="text()" name="insertBreaks">
<xsl:param name="pText" select="."/>
<xsl:choose>
<xsl:when test="not(contains($pText, '
'))">
<xsl:copy-of select="$pText"/>
</xsl:when>
<xsl:otherwise>
<xsl:value-of select="substring-before($pText, '
')"/>
<br />
<xsl:call-template name="insertBreaks">
<xsl:with-param name="pText" select=
"substring-after($pText, '
')"/>
</xsl:call-template>
</xsl:otherwise>
</xsl:choose>
</xsl:template>
</xsl:stylesheet>
when applied on this XML document:
<t>Line1
Line2
Line3
</t>
produces the wanted, correct result:
<p>Line1<br />Line2<br />Line3<br /></p>