you should get an error about using an undefined param
            <xsl:with-param name="anestors"
                                    ^


However you don't need all that recursion it looks like a single Xpath

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
                version="2.0">


<xsl:template match="*">
  <xsl:copy>
   <xsl:copy-of select="@*"/>
    <xsl:attribute name="newseq"
     select="string-join(ancestor-or-self::*/(if (@seq) then string(@seq) else '0'),'')"/>
    <xsl:apply-templates/>
   </xsl:copy>
</xsl:template>     

</xsl:stylesheet>

________________________________________________________________________
This e-mail has been scanned for all viruses by Star. The
service is powered by MessageLabs. For more information on a proactive
anti-virus service working around the clock, around the globe, visit:
http://www.star.net.uk
________________________________________________________________________