<xsl:number> should be used for adding text to the result tree and
only used in variables as a last resort.

Now it would be perfect if the numbering was done as a strict
sequence of consecutive integers, meaning 1,2,3 instead of, say,
1,3,5.

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

        <xsl:attribute name="no"
               select="position() (:within this group:) +
                       (:count of subgroups within previous groups:)
                       sum( for $g1 in ../preceding-sibling::G1 return
                            ((count($g1/M)-1) idiv $M-per-G2 + 1) )"/>

(I made a note to remember using XPath 2.0 comments to make complex
expressions less cryptic.)