I was wondering if somebody could provide an example where using

mode="#all"

(http://www.w3.org/TR/xslt20/#modes)

is necessary and useful.

It seems to me that using this feature can be dangerous and harmful --
when should we recommend it?

It very useful when you apply-templates in different modes, but then
need an overriding template to apply to all modes.

<xsl:apply-templates select="heading" mode="bold"/>
<xsl:apply-templates select="heading" mode="italic"/>

etc, then you need to add a template to output an anchor for each
heading, you can just use:

<xsl:template match="heading" mode="#all">
 <a id="{@id}"/>
 <xsl:next-match/>
</xsl>

cheers
andrew