I need to convert a string into an identifier.

Do your identifiers have to be unique or are you
allowed to create the same identifier for two different input strings?

Earlier I was using the following function:
...
Now, I have to build a name with only containing [A-Za-z0-9] only.

That is very limiting ... the value space for
names in XML includes hyphen and underscore, both
of which would be handy ... are you sure those two characters are not
allowed?

My problem is that I often see characters with modifiers like
00E0 C  LATIN SMALL LETTER A WITH GRAVE
00E1 C! LATIN SMALL LETTER A WITH ACUTE
00E2 C" LATIN SMALL LETTER A WITH CIRCUMFLEX
00E3 C# LATIN SMALL LETTER A WITH TILDE
00E4 C$ LATIN SMALL LETTER A WITH DIAERESIS
...

My questions:
  is it acceptable, from the perspective of a
western language, to replace those characters
with a character without modifier;

I don't think it is a western language
question.  Typically identifiers are created to
be unique ... if you allow ambiguity, will you
still get the transformation results you are
expecting for your downstream processes?

  is there a way to do this in xslt;
  any better option?

How about a convention of two identifier
characters for every string character, using the
second character as a modifier, and some fixed value for "unmodified"?

Thus "abc" would be "a0b0c0" and "dij`" would be
"d0eGj0aA" where "G" is for grave and "A" is for
acute.  With underscore available you could use
it as a diacritic introducer, such that "abc"
would be "abc" and "dij`" would be "de_Gja_A",
thus not changing any string that doesn't have any special characters.

But without knowing more about your constraints,
it is difficult to think of what to suggest.

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