I see you're using 2.0, it's best to say explictly if you want a 2.0
answer as the current version is still 1.0 (2.0 is still in draft)
I don't think you need to keep copying nodes and build copies of the
tree, you want to recursively walk over the existing tree not copy
branches of it:
<x>
<define name="DEF1">
<reg name="REG1"/>
</define>
<define name="DEF2">
<reg name="REG2"/>
<ref name="DEF1"/>
</define>
<block name="block1">
<reg name="REG3"/>
<ref name="DEF2"/>
</block>
</x>
<xsl:stylesheet version="2.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform";>
<xsl:key name="r" match="define" use="@name"/>
<xsl:template match="x">
<xsl:apply-templates select="block"/>
</xsl:template>
<xsl:template match="reg">
Register: <xsl:value-of select="@name"/>
</xsl:template>
<xsl:template match="ref">
<xsl:apply-templates select="key('r',@name)"/>
</xsl:template>
</xsl:stylesheet>
$ saxon8 ref.xml ref.xsl
<?xml version="1.0" encoding="UTF-8"?>
Register: REG3
Register: REG2
Register: REG1
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