So for that input, what is the exact required output?  It's a little
difficult to work it out from the code..... (and probably easier to
achieve using something other than a recursive named template)

Approximately as below.
Wrapping title+following para's with the number in the @sect attrib

<bk>
   <block role="1" sect="1">
      <title>L1</title>
   </block>
   <block role="2" sect="1.1">
      <title>L1.1</title>
      <para>This document defines an XML schema for ....</para>
   </block>
   <block role="2" sect="1.2">
      <title>L1.2</title>
      <para>The normative XML Schema for the OpenDoc ....</para>
   </block>
   <block role="1" sect="2">
      <title>L2</title>
      <para>This chapter introduces the structure of ....</para>
      <para>In the OpenDocument format, each structu ....</para>
   </block>
   <block role="2" sect="2.1">
      <title>L2.1</title>
      <para>A document root element is the primary e ....</para>
      <para>A document root element is the primary e ....</para>
   </block>
   <block role="3" sect="2.1.1">
      <title>L2.1.1</title>
      <para>The content models of the five root elem ....</para>
   </block>
   <block role="4" sect="2.1.1.1">
      <title>L4 test</title>
      <para>The content models of the five root elem ....</para>
      <para>The &lt;office:document&gt; root contains a co ....</para>
   </block>
   <block role="4" sect="2.1.1.2">
      <title>L4 test 2.1.1.2</title>
      <para>The content models of the five root elem ....</para>
      <para>The &lt;office:document&gt; root contains a co ....</para>
   </block>
   <block role="2" sect="2.2">
      <title>L2.1</title>
      <para>A document root element is the primary e ....</para>
   </block>
</bk>

--
Dave Pawson
XSLT XSL-FO FAQ.
http://www.dpawson.co.uk