] <!ENTITY space "&#160;"> <!-- space -->
  160 is not space (32 is) 160 is no breaking space (nbsp in html)

> I did this so that  i may just refer to them in my XSL like
> <xsl:value-of select = "@id"/> &space; <xsl:value-of select = "."/>

                                ^^^^^^^^^^
That will produce three characters in the output.
a space a non-break space and a second space.
You would get exactly the same result with

<xsl:value-of select = "@id"/> &#160; <xsl:value-of select = "."/>

> and try to do things like 
> <xsl:value-of select = "@id"/> &newline;<xsl:value-of select = "."/>
                               ^^^^^^^^^^^
> nothin seems to happen..

there the text node has two characters, a space and a newline character
so it is just as if you had done

<xsl:value-of select = "@id"/> 
<xsl:value-of select = "."/>

and being a white space text node it is removed from the stylesheet.
Note that #160 is _not_ white space. You need to use xsl:text here.

David

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