I have a flat file structure and am trying to add structure to it. Here is
my XML:

<?xml version="1.0" encoding="UTF-8"?>
<root>
     <div type="book" sID="book1">
         <chapter sID="chapter1" n="1"/>
         <p sID="p1.1" n="1"/>Paragraph 1 text.
         <p eID="p1.1"/>
         <p sID="p1.2" n="2"/>Paragraph 2 text with
<emphasis>emphasis</emphasis> added.
         <p eID="p1.2"/>
         <p sID="p1.3" n="3"/>Paragraph 3 text.
         <p eID="p1.3"/>
         <chapter eID="chapter1" n="1"/>
         <chapter sID="chapter2" n="2"/>
         <p sID="p2.1" n="1"/>Paragraph 1 text.
         <p eID="p2.1"/>
         <p sID="p2.2" n="2"/>Paragraph 2 text with
<emphasis>emphasis</emphasis> added.
         <p eID="p2.2"/>
         <p sID="p2.3" n="3"/>Paragraph 3 text.
         <p eID="p2.3"/>
         <p sID="p2.4" n="4"/>Paragraph 4 with <bold>bold</bold> text.
         <p eID="p2.4"/>
         <chapter eID="chapter2" n="2"/>
     </div>
</root>

My desired output is this:

<?xml version="1.0" encoding="UTF-8"?>
<book>
     <chapter number="1">
         <title>chapter1</title>
         <p>Paragraph 1 text.</p>
         <p>Paragraph 2 text with <emphasis>emphasis</emphasis> added.</p>
         <p>Paragraph 3 text.</p>
     </chapter>
     <chapter number="2">
         <title>chapter2</title>
         <p>Paragraph 1 text.</p>
         <p>Paragraph 2 text with <emphasis>emphasis</emphasis> added.</p>
         <p>Paragraph 3 text.</p>
         <p>Paragraph 4 with <bold>bold</bold> text.</p>
     </chapter>
</book>

B B  <xsl:template match="/root">
B B B B B B B  <xsl:apply-templates select="./div[@sID='book1']"/>
B B B  </xsl:template>

B B B  <xsl:template match="div">
B B B B B B B  <book>
B B B B B B B B B B B  <xsl:for-each-group
select="*|text()[normalize-space()]"
group-starting-with="chapter[@sID]">
B B B B B B B B B B B B B B B  <chapter number="{@n}">
B B B B B B B B B B B B B B B B B B B  <title>{@sID}</title>
B B B B B B B B B B B B B B B B B B B  <xsl:for-each-group
select="current-group() except
." group-starting-with="p[@sID]">
B B B B B B B B B B B B B B B B B B B  <p>
B B B B B B B B B B B B B B B B B B B B B  <xsl:apply-templates
select="current-group()
except ."/>
B B B B B B B B B B B B B B B B B B B  </p>
B B B B B B B B B B B B B B B  </xsl:for-each-group>
B B B B B B B B B B B B B B B  </chapter>
B B B B B B B B B B B  </xsl:for-each-group>
B B B B B B B  </book>
B B B  </xsl:template>

Obviously if both chapters and paragraphs have start and end marker
elements it might also be worth wrapping group-starting-with around
group-ending-with (or go for XQuery windowing with start/end)