You're making things much more difficult than they are. Perhaps you have
overlooked that a path expression can start with a variable reference:

<xsl:apply-templates select="define">
  <xsl:with-param name="ref" select="ref"/>
</xsl:apply-templates>

<xsl:template match="define">
  <xsl:param name="ref"/>
  <xsl:value-of select="$ref/ancestor::foo/@bar"/>
</xsl:template>

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